Ladies and gentlemen, thank you for standing by. Welcome to the 3 ms 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. As a reminder, this conference is being recorded, Tuesday, October 25, 2016.
I would now like to turn the call over to Bruce Jermeland, Director of Investor Relations at 3 ms.
Thank you, and good morning, everyone. Welcome to our Q3 2016 business review. On the call today are Inge Tulin, Span's Chairman, President and CEO and Nick Gangstedt, our Chief Financial Officer. Each will make some formal comments, and then we'll take your questions. Please note that today's earnings release and slide presentation accompanying this call are posted on our Investor Relations website at 3 ms.com under the heading Quarterly Earnings.
Before we begin, I would like to address our upcoming investor events highlighted on Slide number 2. First, we have set the dates for our 2017 quarterly earnings calls. They are January 24, April 25, July 25 and October 24. 2nd, we'll be hosting our 2017 outlook meetings on the morning of Tuesday, December 13, at the Grand Hyatt Hotel in Midtown Manhattan. Expectations for this event will be sent this afternoon, So please RSVP as soon as possible.
We hope to see you there. Finally, next June, we will be hosting a European Investor Day at our Germany headquarters in Neuss. A welcome reception will be held the evening of June 6, followed by management presentations and a planned 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 3. During today's conference call, we will 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 Form 10 ks lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to Slide 4, and I'll hand off to Inge.
Thank you, Bruce. Good morning, everyone, and thank you for joining us. In the Q3, 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 through actions to strengthen the portfolio and increased investment in future growth. The Q3 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 $7,700,000,000 flat versus last year's Q3. 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 3 business groups: consumer, Safety and Graphics and Healthcare. Consumer PayStar Company's growth at 3% with positive growth in all businesses.
Safety and Graphics was 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 4th 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 strength of our business model has enabled us to deliver premium returns and generate healthy cash flow. Companywide, we increased margins 40 basis points to nearly 25%, ranging from 32% in Healthcare to Yashchai 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.
And in the quarter, we returned SEK1.4 billion to our shareholders through share repurchases and dividends. We also continue to build our enterprise for the future and I will make some comments on our recent progress. Please move to Slide 5. 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 3 levers that are creating value for enterprise and that we continue to make good progress on.
2 of the levers, investing in innovation and portfolio management, are important to 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 offerings with those of other organizations. Most recently, we finalized an acquisition and established one partnership, both related to health care. 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 Semifinder, 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 the collaboration with Vermi, the life science business of the Alphabet company. This is a partnership between 2 highly creative and innovative companies that will leverage our expertise in health care coding with their expertise in data analytics and software. Ultimately, we would develop tools to help providers increase the quality and affordability of health care, 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 out our recent actions to prepare 3M for the future. 3 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 3rd lever, business transformation, with 2 recent ERP rollouts in West Europe. As a reminder, we have now deployed ERP in 15 countries and in 4 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 6 for a recap of our Q3 sales performance. Organic local currency sales declined 80 basis points in the 3rd quarter with volumes down 1.4% and selling prices up 0.6%. Our acquisitions of Capital Safety and membrana, net of 3 small divestitures, added 0.3 percentage points to sales.
And foreign currency translation increased sales by 0.5%. In U. S. Dollar terms, worldwide sales were flat versus the Q3 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 ChinaHong 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 7 for the 3rd quarter P and L highlights. 3rd quarter sales were $7,700,000,000 and we generated record 3rd 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, 1st year acquisitions reduced margins 10 basis points. This includes the impact of capital safety and membrana. We continue 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. And 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 8 for a look at EPS. Earnings per share in the Q3 were $2.15 an increase of 4.9% versus the Q3 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 pretax earnings by $20,000,000 or the equivalent of $0.02 a share. The 3rd 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. And finally, we reduced average diluted shares outstanding by 2% year on year, which added $0.04 to 3rd quarter EPS.
Please turn to Slide 9 for a look at our cash flow performance. We generated $1,900,000,000 of operating cash flow in the quarter, a $244,000,000 increase year over year. Lower cash taxes drove the increase, offset in part by higher year on year pension contributions. Q3 CapEx investments were $347,000,000 in line with last year's Q3, and we now expect full year CapEx in the range of $1,400,000,000 to $1,500,000,000 3rd quarter free cash flow conversion was 117%, up 16 percentage points versus the same period last year. And for the full year, we continue to expect free cash flow conversion in the range of 95% to 105%.
As a reminder, our 4th 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 $670,000,000 in dividends, up $35,000,000 year on year. We also returned $774,000,000 to shareholders through gross share repurchases or $2,800,000,000 year to date. We now expect our full year gross share repurchases to be in the range of $3,500,000,000 to $4,500,000,000 versus a prior range of $4,000,000,000 to $6,000,000,000 Let's now review each of our business groups starting on Slide 10. Our Industrial business posted sales of $2,600,000,000 in the 3rd 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.
3rd quarter organic growth in our U. S. Industrial business improved slightly versus the first half of twenty sixteen, and 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. Membrona continues to exceed our sales and profit expectations.
Finally, our industrial business delivered operating income of $591,000,000 in Q3 and margins were up 30 basis points to 22.9%. Please turn to Slide 11. 3rd quarter sales in Safety and Graphics were $1,400,000,000 with organic growth of 2%. Q3 organic growth was led by our Roofing Granules and Commercial Solutions businesses. Brooklyn Granules posted another strong double digit increase in the 3rd 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 $364,000,000 and operating margins were once again strong at 25.1 percent, up 2 20 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 $1,400,000,000 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 $429,000,000 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. Quarter sales in electronics and energy were $1,300,000,000 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 3rd quarter. Our 3rd quarter operating income for Electronics and Energy was $312,000,000 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 $1,200,000,000 and organic growth of 2.9%, which led the company. Geographically, consumers 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, Scotch Blue painters 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 $317,000,000 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 the 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 the prior range of down 1% to 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 the prior range of 29% to 29.5%. Lastly, we continue to expect free cash flow conversion in the range of 95% to 105% for the full year. With that, we thank you for your attention and we'll now take your questions.
And our first question comes from the line of Joe Ritchie with Goldman Sachs. Please proceed with your question.
Thanks and good morning everyone.
Good morning, Joe. Good morning, Joe.
So 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. And so 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?
Well, I think, 1st of all, geographically, U. S. Slowed down, and it slowed down basically in the last months of the quarter. And then I think there's 2 other elements out there in the world that happened to that business. Some, it's in developing economy where Brazil had a little bit of slowdown.
It was more than we expected. And then as you know, things are going on in Central East Europe, specifically in Turkey, that's generally speaking. But 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, like just try to I think try to move some purchases forward maybe 1 to 2 quarter. That's what we're talking about like midterm or short term tempering. So I would say all businesses, except one, which is oral care, had positive organic local currency growth and oral care was flat.
So still showed growth, but it was tempered. And by definition, I'm not concerned at all relative to the future of that business. And we continue to invest for the future. And we have done quite some investments, as you know, over the last couple of years, right? So there is no concern.
It was just that the slowdown and it was basically in the last months of the quarter.
Got it. That's helpful color.
And I guess just following on the kind of soft market conditions to persist comment, does that mean we should be expecting kind of 1% to 2% type growth in this business moving forward? Or how are you guys thinking about that?
No, 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 Q4 of this year. It will maybe be very similar to the Q3 and then it will come back in the Q1. I cannot tell you here and now and we cannot tell you here and now when in the Q1 that will come.
It's early, mid or late in the quarter, but it will come. So we don't change the guidance at all for this business moving forward into 2017.
Got it. Okay. No, that's helpful. And 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 and 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. So just curious, maybe talk a little bit about the M and A pipeline and just the reasons for the reduced
positive guidance? Relative to the pipeline, it's still very good in terms of what we are looking upon in all businesses. And as I've said earlier, there's some prime targets in terms of business groups there. And if you think about it, with industrial, onethree of the company, of course, we have interest in that business. Healthcare and Safety and Graphics continue also to be prime objectives for us.
But the pipeline is very solid for all of the 5 business groups. So, solid, as always, we have a look upon it from a strategic perspective and then make sure that the valuation is acceptable for us. And Nick will make some comments here relative to buyback.
Yes, Joe. As you've seen year to date, we've repurchased $2,800,000,000 of our stock. And in Q3, we the market was trading at near all time highs. And you've heard me say this before that one of the factors that influences our repurchase activity is relative value and price. And as you know, that's why we stepped up our activity earlier in the year in Q1.
So over time, the pace of our repurchases is dependent on other demands on capital such as M and A along with the relative value of the stock. And those things are what's impacting us now putting the guidance at $3,500,000,000 to $4,500,000,000 for the year.
Got it. Thanks guys.
Thank you.
Our next question comes from the line of Andrew Kaplowitz with 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 'seventeen, but 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, but obviously we know the pension and FX has offset. So maybe any more color that you can give us as we're getting closer to 'seventeen here?
Sure, Andy. As you can imagine, we're still working on our 2017 outlook. And on December 13, 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 'seventeen. 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. And 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. And then business transformation, I expect that to have a increased positive impact on our earnings per share and that margin in 2017. I think you've heard me say that we expected and we're realizing approximately $50,000,000 of operating income benefit from business transformation as part of in 2016. And that's part of our journey moving to $500,000,000 to $700,000,000 of savings by 2020.
And 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 $150,000,000 headwind for 3 ms in 2017. And 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 $100,000,000 So all in, Andy, that's the puts and takes of a preview of what I expect we'll be talking about in 1.5 months.
Okay. That's very helpful. And maybe just to ask you about industrial. You said the U. S.
Looked a
little better, but overall, it
seems like industrial 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, in 4Q and you expect growth. Advanced Materials, I mean,
it should shift, especially as
you've got this defense contract from quarter. So, should we get should we resume low single digit growth moving forward? And how confident are you of that in that business?
Yes. As you said, so it being U. S. That hold back industrial during the last couple of quarters. It was better in Q3, so that's positive.
And we will see positive growth for industrial in Q4. And 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. But 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 electronic and energy, but in safety graphics and in industrial as well. So 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. So in fact, we have fired some of our portfolios over the years, right? So it takes some time as you go through that process, right?
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. But I'm very positive that we now will start to see industrial turning the corner here as we move forward. And we will see the Q1 happen here in Q4.
Our next question comes from the line of Clive Davis of Barclays. Please proceed with your question. Hi, good morning guys.
Good morning,
Strauss. I want to get
a sense, when I look at Connex and Energy, you have the you're going to anniversary the renewable energy exit that's 300 basis points. So pound per pound, that means you're down 4.5% percent, down 7.5%. I mean, do you have a sense of and 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? And I know your comment earlier is a bit better, but can we count it as not hurting us anymore, I guess, is my question.
Yes. Good morning, Swad. I think first of all, you have to look upon that business in terms of the overall portfolio. So for this quarter, you have to make a couple of comments, right? We did better in electronics than we thought, and it was slightly tougher in energy.
And in the energy piece was some big project that was delayed, specifically in telecom and in utilities. So I think that's again coming back to uncertainty in the market. It was not much of a shift, but it was a little bit of a shift. All in, we were down 8 exactly as we told you at the last earnings call. So we feel good about that piece.
Going forward, as we have shifted the portfolio there as well, we will, as we go, start to see some positive evolution relative to growth rate because we are moving to segments that are growing faster and where we are more relevant. So if you look upon it, 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 take and look upon. It's very much design and assembly. So we have a range in the 5 year plan, as you know, of 0 to 4.
We are in the 1st year of that plan, which is then down. So it will be still the low end of that range. But 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. And then as a follow-up
on M and A, and I know
And you said the other thing that's you look upon the margins now in that business, right? That business is now running almost 20 they are 20 4%. So 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 have been going on.
So 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 we drive productivity and efficiency for our customers and also margins for us. So 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%, we will we'd be terrible on the margin. So I feel confident now with our model there.
And now as we move forward, now we will start to see some positive growth.
I remember those days well. Just a quick follow-up, guys. When you're looking at transactions, and I think again in the past, you've seen like to start to look at some things
that are a little bit bigger.
I mean, what are the probabilities we see in a deal is larger than capital safety over the next 12 months?
It'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'd 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. And by definition, in order for us to move the needle forward, they should be more sizable than we did in the past. So I think I'll hold it for them. And when the news are coming out, we're looking upon the size of them.
But we are ready. I mean, we are ready. 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.
The next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question.
Hi, good morning.
Good morning, Julian. Good morning. Just wanted, first
of all, if you could give a little bit more color on the slowdown you saw in the EMEA region in recent months relative to Q2? I know you talked a little bit about Turkey had slowed. But did you see anything broader, anything in Western Europe, for example?
Well, yes. So if you start, 1st of all, of Central East, Europe and Middle East, Africa. So yes, of course, we saw due to the situation that we saw Turkey slow specifically.
And I
think there was some slowdown also in Saudi Arabia. But I think 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 West Europe, we had a very good quarter last quarter in West 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, there was 6%. So you add into that because a quarter or year doesn't stop and end with a date, right? So you look upon that. You take the biggest economy in West Europe, Germany, 6 for 3.
Let's say they are going now around 4 and the business transformation is helping them. So I think the biggest concern Yellen is taking 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. So if automotive is doing well, we are doing well as well.
So but you saw this time, good growth in Sweden, good growth in Spain, Germany 3%. That's better growth in United States.
Very helpful. And then 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 enhancing film in light of that transition. And also, 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?
Yes. I think when you think about the cost, think about 3 ms 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. And then number 2, that we have manufacturing assets that can be used in multiple businesses. So I and as you can see now, the margin in that business, the EPG as a business group, is on a very respectable level.
So I would not be concerned of the 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 LNG and OLED, we are providing solutions to those devices also that have OLED. It's slightly less, but then versus LED, but we are still in that business, and it's expanding in a way. I will say you go into next year, I would look upon it maybe similar to 2016 as we roll into the year.
But we have worked on that for a long time. This is not a surprise for us. So that means that technology is in the pipeline. And as I said, technology transition is always giving you either short term uptick immediately or you have to and have a little bit of drag. But it will not be very, very long.
Our next question comes from the line of Stephen Winoker of Bernstein. Please proceed with your question.
Good morning. This is Peter on for Steve.
Good morning, Peter. Hi, Peter.
I was hoping maybe we could talk through some of the core pricing dynamics a little bit. So sort of parsing out between how much pricing was to offset FX headwinds and how much was core sort of pricing increases? Because it looks like price in the U. S. Was negative, but in many regions with positive price that those are regions that had negative FX, if you could talk to that a little bit.
Of course, Peter. Yes, for the Q3 in total, we reported 60 basis points of price growth and 30 basis points of that was related to pricing adjustments we make in relation to FX. So we can split that right down the middle. 30 of it is core underlying price growth and another 30 related to FX. And many of you have probably heard me say over time that stripping out FX that our core ability to price ranges between 30 basis points and 50 basis points.
So we saw Q3 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. And there's selected businesses at any given time where we're choosing to raise price, somewhere we're choosing to lower price based on competition. And 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. And 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 100 basis margin benefit.
Okay. Okay. That's great. And then just maybe last one on that on the same point. How much what was the split between price and raws in the quarter?
Of the 100 basis points of price raw materials, 70 basis points is coming from lower raw material prices and 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. So that's 70 basis points and then the other 30 basis points from the price I talked about earlier.
Okay, got it. That's helpful. Thanks very much, guys.
Yes. Thank you.
Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question.
Hey, on the Electronics and Energy margins being up at 24% even on the down volumes. How should we think about that segment now? I mean, you've got all the other segments sort of 22% or better. The comps are easing there. I mean, should we now expect that, that kind of joins the rest of the group here or 22% or above on an annual basis?
22% for the EBG, is that what you asked or
Yes, electronics and energy, I mean, seasonally, it's a little stronger here at 20 4, but you've gotten every other segment up 22 and now you've changed the business model there, the volumes are easing. I mean, is that kind of a reasonable entitlement view of where that segment should go?
Yes, Shannon, we expect E and E's margin for the total year of 2016 to be about 20% operating income margin. And it remains one of the businesses that we continue to see overweight margin expansion capacity in the coming years. So we're certainly striving to get it up to the company average, and I think you'll see it overweight for margin expansion in the next couple of years.
Okay, thanks. And then just on this sort of temporary healthcare slowdown that you're seeing, can you just a little more color on what's driving that? I understand it's going to get temporary and it's going to you're confident in the future. But is it more channel inventories? Are there specific uncertainties that are driving a pullback?
It seemed like it was kind of broad based
in the U. S. Yes.
I think the reality of business is that it will be both, right? But it's stopped by people holding back a little bit and then they work down the inventory, right? But it's not an inventory correction in any sort of shape or form. I think it's yes 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. So 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 or policies as you move forward, etcetera.
So I'm not to honestly, I'm not concerned at all because of, as I said, And we'd like to see more growth there, of course, with the margins we have, but it's not an overly concern at all.
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. Good morning. I think I realize you have various industrial initiatives you're working on.
If you give us your compares in the Q4 and obviously into next today in terms of the sequential trend? Is it getting better? Is it flat at the end of the quarter, get a little softer as some companies experience? What did you see? Again, not your initiative.
I realize you've got an initiative in putting your outperformance, but what are your markets industrially doing?
Yes. Well, as you saw, the U. S. IPI was negative 80 basis points in the quarter, right, for Q4. So you think about that in terms of some negative thing there.
But we see indications of positive movement in the industrial space relative to manufacturing. So it's we are not immune to the overall industry. And when you at least what is protected now for the IPI in this 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. And if you look into the year as we move ahead, industrial is going for us over many, many segments, if you like, right, even into shifting graphics and some pieces also in energy.
And we see slightly positive movements in that total market segment as you move into next year.
And I'm sorry, Ingo,
what are your what indications are
you looking at where you
say there's positive movement relative to manufacturing? You're talking about the macro. Is that sort of the customer commentary? Or are you inventory or what exactly are these indications?
Yes. I think it's both. It's like when you work with a customer, you get the indication of what 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, right?
And I think it's an okay level at this point in time.
Switching to electronic energy, could you size for us how big your businesses are that would have some sort of a would touch in some manner LED or OLED, like I mean, how big are these businesses?
Is it like $1,000,000,000,
$1,500,000,000 something like that?
John, our electronics business is $3,000,000,000 out of the Electronics and Energy business. The Display Material Solutions division within Electronics is about 60 percent of that total $3,000,000,000 so about $1,800,000,000 So and much of that is connected with LCD, but not all of it.
Yes. And what do you believe is the
mix today of LED in these applications versus OLED or OLED?
Well, it depends, John, on device. Right now, mobile phones is the most significant device impacted between LCD and OLED. And we see that as approximately 30% OLED today in 2016 and about 70% still LCD.
And where the rest are lower in the mix?
Right. For instance, television still vast, vast majority, LCD or LED and tablets is a pretty small number there as well.
And then 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? Because relative to
I realize that's actually like the hedging gains issue,
I'm sort of excluding that in the context of tons collapsed, euros down, it's not down that much. So all else equal, is it net positive or negative for 3
ms and maybe you could put it in the context for us?
John, it's about as close to a net neutral as you can imagine outside of FX. But from a standpoint, we make some things in U. K. That we export. We also import things to U.
K. So it's very close to net neutral. Just having the pound devalue that of course has a negative impact, but I think you're asking more of the underlying and that really has we're not a gainer or a loser in that.
So you're fairly exhausted to those the pound print.
So if the pound goes to parity, you're fairly exhausted to that scenario. So from
a pound perspective, if for a 5% move in the pound, that would be about a $0.01.5 negative impact on us just taking the FX impact of our U. K. It's about 3% of our total global business. And just to size it up, how the pound movement impacts our total earnings per share.
Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question. Thanks.
Good morning, gents. First, on the help me better on the 17,000,000,000,000 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 kind of piling on 17. And I'm wondering, you mentioned macro sort of sideways, I think, is pretty in line with expectations. What sort of growth rates do you think 3 ms can generate in another flat year?
And I'm asking in the context of a 3% organic consensus expectation next year. Is 3% even in play here or any comments there would be helpful?
Yes. Nigel, I'll have to ask you to wait until December 13 for more specific numbers on that. 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. And then incrementally that we see better improved growth in both industrial and electronics and energy.
But the actual numbers, let's wait till December 13 to talk about those.
Okay. No, it's worth a try, I guess. On pricing, I was quite surprised to see Latin America
and Canada still above 5%, given that
the currency movements start to level off through the year. So I'm wondering is that more of an inflationary type of impact that we've seen with that pricing? And therefore, would that be sticky going forward?
Yes. Nigel, when I look at Latin America and our price growth there, yes, as 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. So yes, it's much more around inflation than it is around FX right now.
The best 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. Thank you very much.
Our next question comes from the line of Robert McCarthy of Stifel. Please proceed with your question. Good morning, everyone.
Good morning.
So 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? Or do you think it's just kind
of steady state? I mean, does
the environment that's presented to you create more opportunities in general on structural restructuring, business transformation or cost takeout to accelerate some actions that you otherwise wouldn't take given the demand environment?
Yes. Well, I think, first of all, I don't think we're in a situation that we were at 2,008 or 2,009 where really everyone was pushed to do 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. And I think that's an important differentiation to think about it. And 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.
And 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 3 ms that both can grow and is becoming even more effective relative to operational excellence in the company. So we will go as fast as we can, but we are not taking any risks relative to be able to serve important element. We are here to deliver to you what you expect, but we're also here, of course, to deliver to our customers. So I think you have this balance always when you implement new initiatives that you will like to go fast, but you have to make sure that you really understand the implication with the customer.
So 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, but you have always to think about customer first when you make those changes. But by definition, when you think about what we do in West Europe now in terms of our inventories and so forth, yes, of course, it will be less SKUs because you consolidate inventories at fewer places, etcetera. And 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. So 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. And just one brief follow-up. I guess in terms of the growth for sideways for 'seventeen, it is what it is. I want to get more color on that on December 13th Analyst Day.
However, are there 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 'seventeen or 'eighteen where you think you have capability for significant outgrowth? Yes.
Well, 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, all GDP. That is, of course, not happening every year. So but 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 the portfolio, relative to improved commercialization processes, etcetera, we should be able to do slightly better than that as we move ahead. I don't make a distinction in between certain segments 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 expectation. That's why we are there. If we don't do that, we are not relevant in that segment to our customers, and then we have to do something different. So that comment I would like to make is we cannot predict when a turnaround is coming in the economy. We cannot predict that.
I don't think anyone can. But 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. So 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. Good morning, Deane. Hey, just a quick question for me and Nick. Regarding the lower tax rate this quarter, you mentioned a favorable audit, but did you also repatriate as much cash as you had talked about last quarter?
Yes, Deane. We've 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. So it's eked up a little, but not significantly, Jean.
Got it. And then just to clarify, and I might have missed this, on the strategic investments in the quarter, the manufacturing, restructuring, what segments for those addressing and do you plan to do more there? Yes, the strategic investments that we had in the Q3, some of them touch multiple businesses, including healthcare and industrial in the Q3. And 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.
We're highly I'm highly confident the 4th quarter will be the highest quarter for strategic investments for 3 ms for 2016 and pretty close to being in line to what I originally guided last December.
Got it. Thank you. Thank you, Ian. Our next question comes from the line of Laurence Alexander of Jefferies and Company. Please proceed with your question.
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?
Yes. Hi, good morning, Laurence. Yes. Well, first of all, if you take our operation in China, we 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. So if you take the 5 business groups for us in China, SG and G grew 18%, consumer 12%, health care, 8% and industrial, 2%.
And then
electronic and energy was down. But if you think about that, we had 4 or 5 business groups in China growing, and it was very much in consumer health care, automotive aftermarket, automotive OEM and personal safety. So I think that what we have talked about for quite some time about so it's not really a shift. It's to grow out the domestic businesses. It's coming.
But on the other hand, it's a little bit slower, I think, we think versus the original plan. But if you think about our business, if you take the electronic part, right, which is very much in Asia and in China, we had a 4% growth in China. You will like it to be 12%, but it's 4%, and it's the biggest subsidiary outside of United States for us. So I am slightly as we move ahead relative to China. Now that team is driving productivity big time, right?
That's the model there today versus 5 years ago is different. Everything was about growth, right? We grew 15% to 20% year over year. We don't any longer. We grow 4%.
So 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. So I hope that helps in terms of explaining China.
Just competitive pressure in the areas where you're seeing any real shift that matters?
No. I think you have over a year seen more domestic businesses or companies, the type of stepping up. And I would say, in all honesty, yes, in some segments, which is maybe more commoditized, it could be a challenge. And for us, as you know, we work very much with technology conversion and with brand equity. So it's less impact to us.
But of course, there is competition. And I would say I will more relate that maybe to local companies that are tied 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. And you have to ask yourself, in the end of the day, if you're 3 ms, would you like to play in that area, right? As I said, in E, E, P and G, rather fire some SKUs if I don't make money and have lower growth, but better margin.
Got it. Thank you very much.
Thank you. Our next question comes from the line of Steve Kusa of JPMorgan. Please proceed with your question.
Hey, guys. Thanks for fitting me into the end here.
Hi. Good morning. Good morning, Steve.
Good morning. So 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?
Yes, 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 was a tough comp to last year? Is it the Health Information Systems business that maybe see a bit of hiccups back to the strategic evaluation? What would you point to sitting in health care that we should be watching over the next couple of quarters?
No. As I said earlier on the call, it's basically United States that have temporary itself for the quarter. So 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.
But more than that, it's I wouldn't be overly concerned about it, and I am not. And I think that's maybe the best piece for me to be honest, but I'm not overly concerned. But as I said, maybe in Q4, we would see equal quarter to Q3. In theory, some uncertainty is in place.
Okay. One
last We continue to invest. I just told you about 2 we did one acquisition in Switzerland for Health Information System and then we also signed a partnership Verily that is both Verily and 3M2, very creative, dynamic companies that are building our platform. So we look very, 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 kind of back into the 100 you're guiding to for the year, given you've been above that so far for the year, is
that is that about the right number for
the Q4? Is that just conservatism? Or is that kind of a new solid run rate you expect going forward? Just trying to kind of keep the ball close there a little bit.
Yes, Steve,
we have been seeing the benefits from raw materials slipping 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. I don't think we'll over read that, Steve.
Got it. That makes sense. That's our job to over read everything. Sorry.
Thanks. Talk to you soon.
Thank you. Thanks. That concludes the question and answer portion of our conference call. I will now turn the call back over to Amy Turpin for some closing comments.
Thank you. Looking ahead, we remain focused on executing the 3 ms 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 and make us even more relevant to our customers. So 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 their 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 13. Have a great day. Thank you.