Ladies and gentlemen, thank you for standing by. Welcome to the 3 ms 4th Quarter Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded, Tuesday, January 26, 2016.
I would now like to turn the call over to Matt Ginter, Treasurer and Vice President of Investor Relations at 3 ms.
Thank you. Good morning, everyone, and welcome to our Q4 20 15 business review. Let me kick off today with a reminder of our upcoming 2016 investor events. On Tuesday, March 29, we will be hosting an Investor Day at our headquarters in St. Paul, including a welcome reception the evening before at our new R and D laboratory.
Registration for the event will be sent out later this week. Also, our upcoming quarterly earnings calls are scheduled for April 26, July 26 October 25. On the call today are Ingo Telleen, 3 ms'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. As a reminder, today's earnings release and slide presentation are posted on our Investor Relations website at 3m.com.
Please take a moment to read the forward looking statement on Slide 2. 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. Now please turn to Slide 3, and I will hand off to Inge.
Thank you, Matt. Good morning, everyone and thank you for joining us. I will open my remarks with an overview of our Q4. And later in the call, I will give you a recap of our full year performance. 3 ms finished 2015 with a narrow quarter of disciplined execution in a challenging external environment.
Across our enterprise, we controlled the controllable while investing in our business and returning cash to our shareholders. With respect to our earnings per share, we posted GAAP EPS of $1.66 down 8% year over year. As you recall, in October, we announced our corporate restructuring, which was completed in the 4th quarter. This action resulted in a Q4 pre tax charge of $114,000,000 and will deliver savings of $130,000,000 in 20 16. Excluding these Q4 charge, we posted earnings per share of 1.80 dollars Company wide, organic local currency sales declined 1.1%.
Consistent with our expectations at our December outlook meeting, organic growth was down low single digits in our 2 industrial related businesses, namely Industrial and Safety and Graphics. Also as expected, Electronics and Energy decreased in the high single digits as the consumer electronics market softened. On the positive side, our 2 consumer driven businesses posted strong organic growth in the quarter. Consumer was up nearly 3% organically, while healthcare increased almost 5%, its highest growth of the year. Acquisitions added 1.5 percentage points to our sales, while the stronger U.
S. Dollar reduced sales by nearly 6%. In total, Q4 sales were 7,300,000,000 dollars Looking at margins, we delivered another good broad based performance in the quarter. When you exclude restructuring, margins were up 60 basis points to a healthy 22% with 4 of our 5 business groups posting margins greater than 21%. In the 4th quarter, we posted strong free cash flow with a robust 182% conversion.
We also continue to invest in our business, while returning nearly $2,000,000,000 to our shareholders through dividends and share repurchases. Overall, we had a solid finish to the year. And now I will turn the call over to Nick, who will give go through the details
of the quarter. Nick? Thank you, Inge, and good morning, everyone. I'll start by covering sales growth on Slide 4. Organic local currency sales declined 1.1% in the 4th quarter with volumes down 2.3% partially offset by selling prices which were up 1.2%.
Acquisitions net of divestitures added 1.5 percentage points to sales. This impact includes the acquisitions of Capital Safety, Polypor's Separations Media Business and Ivera Medical, along with the divestitures of library systems and our license plate converting business in France. Finally, foreign currency impacts reduced sales by 5.8 percentage points with notable year on year declines in the euro, yen and Brazilian real. As a result, in U. S.
Dollar terms, 4th quarter worldwide sales declined 5.4% versus last year. In the United States, organic growth was down slightly as we experienced weak end market demand in our industrial related businesses. At the same time, our consumer orientated businesses, healthcare and consumer continued to deliver positive organic growth. Organic growth in Asia Pacific declined 2.7%. 3 of our 5 business groups posted positive growth in the region, led by Healthcare and Consumer, while Electronics and Energy declined high single digits.
Within Asia Pacific, organic growth declined by 3% in both Japan and ChinaHong Kong. Excluding our electronics businesses, Japan was up 3% organically, while ChinaHong Kong declined 3%. Moving to EMEA, organic growth increased 1.1% with Central East Europe up high single digits, West Europe up slightly and Middle East Africa down mid single digits. Finally, organic growth in Latin America Canada declined 60 basis points. Brazil declined 6%, while Mexico continued its trend of strong organic growth increasing 7%.
Please turn to slide 5 for the 4th quarter P and L. Company wide, 4th quarter sales were $7,300,000,000 with operating income of $1,500,000,000 GAAP operating margins in the quarter were 20.5 percent, down 1 percentage point year on year. Excluding restructuring, margins increased 60 basis points to 22.1%, which reflects our ability to execute and effectively control those things within our control. On the right hand side of this slide, you'll see the various components of our 4th quarter margin performance. Let me comment on the primary drivers impacting margins during the quarter.
Lower raw material costs and higher selling prices contributed 2 percentage points of margin expansion. Our global sourcing teams continue to capitalize on the impact of lower commodity prices and are generating additional savings above market. Foreign currency, net of hedge gains decreased margins by 30 basis points. 4th quarter strategic investments lowered margins by 40 basis points, primarily driven by portfolio management actions in our Renewable Energy business. Similar to past quarters, higher pension and OPEB expense reduced margins by 60 basis points.
Finally, our 4th quarter pre tax restructuring charge of $114,000,000 reduced margins by 160 basis points. As Inga mentioned, these actions will result in a pretax savings of approximately $130,000,000 in 2016. Let's now turn to slide 6 for a look at earnings per share. 4th quarter GAAP earnings were $1.66 per share, down 8.3% year on year. Our restructuring decreased GAAP earnings by $0.14 per share.
Excluding these costs, earnings were 1.80 dollars As you see a number of other factors impact also impacted our earnings. Growth and margin expansion added $0.03 to earnings in the quarter, which includes headwinds of $0.05 from pension expense and $0.04 from strategic investments. Excluding restructuring, our 4th quarter tax rate was 28.6% versus 28% in last year's 4th quarter. This reduced earnings by $0.01 per share. Foreign currency impacts, net of hedging, reduced pretax earnings by $96,000,000 or the equivalent of $0.11 per share.
Acquisitions and divestitures increased earnings by $0.02 per share. Finally, average diluted shares outstanding declined 4% year over year, which added $0.06 to 4th quarter EPS. Please turn to slide 7. We delivered strong free cash flow in the 4th quarter with a conversion rate of 182%. The primary driver was improved working capital.
Free cash flow was $1,900,000,000 up $199,000,000 year over year. For the full year, we posted free cash flow conversion of 103% similar to 2014. In 2015, we continued to manage towards a better optimized capital structure. We added leverage of approximately $4,000,000,000 which helped fund investments in organic growth, acquisitions and the return of cash to shareholders. In the Q4, we invested $446,000,000 in CapEx, bringing our full year investment to just under $1,500,000,000 For 2016, we expect capital expenditures to be in the range of $1,300,000,000 to $1,500,000,000 Also in the Q4, we returned $1,800,000,000 to shareholders via dividends and gross share repurchases.
During 2015, we returned nearly $8,000,000,000 to shareholders, including cash dividends of $2,600,000,000 and gross share repurchases of $5,200,000,000 Now let's review our business group performance starting with Industrial on slide 8. Industrial posted quarterly sales of $2,500,000,000 Organic growth was minus 1.8 percent, reflecting a slow industrial economy, which impacted our business. In particular, our Advanced Materials business declined high single digits impacted by weak demand in the oil and gas end market. On a positive note, our automotive OEM business grew high single digits as we continue to gain share by increasing 3 ms's contents per vehicle. This business has consistently grown faster than global car and light truck production levels.
3 ms Purification also posted strong organic growth in the quarter. The acquisition of Polypore's separations media business, which enhances 3 ms's core filtration platform added 1.7 percentage points to industrial sales growth. Integration activities and financial performance are on track and meeting expectations. On a geographic basis, Industrials organic growth was positive in EMEA, Latin America, Canada and Asia Pacific, while the U. S.
Declined mid single digits. The industrial business delivered operating income of $476,000,000 in the quarter with operating margins of 19.3 percent or 21% excluding restructuring. In addition, the business is absorbing the Polypor Separations Media acquisition, which reduced margins by another 50 basis points. Please turn to slide 9. 4th quarter sales in Safety and Graphics were down 2.5% organically to $1,300,000,000 As a reminder, organic growth in this business was up over 9 percent in Q4 2014, which included a $30,000,000 impact from Ebola related demand for personal safety products.
Excluding this impact, Q4 sales in our Safety and Graphics business was flat organically. Within Safety and Graphics, our Commercial Solutions business had another solid quarter, which capped off a strong full year of mid single digit growth. Acquisitions net of divestitures added 4.6 percentage points to sales growth. As a reminder, in August, we acquired Capital Safety, a leading provider of fall protection equipment. Integration is on track and the business is meeting operating income targets.
On a geographic basis, organic growth declined in all regions. Operating income was $282,000,000 in the quarter and operating margins increased 1 percentage point to 21.8 percent or 22.7 percent excluding restructuring. The net impact from acquisitions and divestitures added 150 basis points to Safety and Graphics 4th quarter operating margins. Please turn to slide 10. Our Healthcare business generated 4th quarter sales of $1,400,000,000 with organic growth of 4.5%.
Organic growth was broad based led by double digit increases in both health information systems and food safety with oral care up mid single digits in the quarter. The Ivera Medical acquisition added 80 basis points to 4th quarter sales growth and continues to exceed performance objectives. Healthcare grew organically in all geographic areas led by Asia Pacific. This business continues to drive penetration in developing markets with 8% organic growth in the quarter. China Hong Kong was particularly strong with double digit organic growth.
Operating income was 444 $1,000,000 up nearly 3% versus last year's Q4. Healthcare's operating margins were 32.1%, up 110 basis points year over year or up 180 basis points excluding restructuring. We continue to be pleased with the strong and consistent performance of our Healthcare business and we'll continue to invest in this business to drive greater success. Next, let's cover Electronics and Energy on slide 11. 4th quarter sales for this business group were $1,200,000,000 down 7.7% organically.
On the electronics side, organic sales declined 8% impacted by weakness in the consumer electronics end market and excess channel inventory. We expect this softness to continue into the Q1. Our energy related businesses were down 6% organically as sales declined in renewable energy, telecom and electrical markets. On a geographic basis, organic growth was down across all areas. Operating income for Electronics and Energy was $200,000,000 with operating margins of 16.5% or 17.5% excluding restructuring.
In addition, portfolio management actions in our Renewable Energy business reduced electronics and energy margins by 2.4 percentage points. For the full year, operating margins were 21.1%, up from 19.9% in 2014. Our portfolio actions in this business group over the last 3 years continued to pay off in 2015. These actions are enabling us to deliver solid margins even in the face of challenging conditions in both electronics and energy end markets. I'll finish with our Consumer business on slide 12.
4th quarter sales in Consumer were $1,100,000,000 Organic growth was a solid 2.7% paced by our home improvement business. This business continues to win in the marketplace with leading brands such as Filtrete Filters and Command Adhesives. Stationary and office supplies and home care were also up organically, while organic sales declined in consumer healthcare. 4th quarter holiday sales were strong, driven by solid demand for our category leading Scotch and Command branded products. Looking at consumer geographically, organic growth was broad based across all areas led by the U.
S. Consumers operating income was $254,000,000 with operating margins of 23.1% or 23.4% excluding restructuring. That wraps up our review of the 4th quarter business results. Please turn to slide 13 and I'll turn it back over to Inge. Inge?
Thank you, Nick. With a narrow solid margin and cash flow performance, our 4th quarter capped off a year of disciplined execution and efficient growth from our global team. Even in a low growth environment, we expanded full year margins nearly a full percentage point to 23.3% excluding restructuring. In 2015, for 2nd year in a row, we posted free cash flow conversion above 100%. We also delivered a strong return on invested capital of 22.5 percent coming on top of a 22 percent return in 2014.
Beyond these solid financial results, I view 2015 as a fundamentally important year in terms of 3 ms's future. This is because of the investments we made and the actions we took to position our company for long term success. As you see, last year we invested a total of $7,000,000,000 in research and development acquisitions and CapEx. We also made significant progress on our 3 key levers, which represent important value creators for enterprise. The first is portfolio management, which is all about strengthening and focusing in our portfolio of businesses.
We do this through both acquisitions and divestiture and also through business consolidation. Last year, we took actions on all fronts. In Healthcare, as an example, we combine our dental and orthodontic businesses into 1 single oral care solution business. Consolidating businesses allow us to allocate resources to our best opportunities, while creating greater customer relevance, scale, productivity and improved speed. Since 2012, in fact, we have realigned from 6 sectors to 5 business groups and from 40 businesses to 26.
To complement organic growth, we also made 3 strategic acquisitions in 2015. This includes Capital Safety and PolyPost Separations Media Business, which enhanced 2 of our core technology platforms, personal safety and filtration. At the same time, we divested 3 businesses that no longer fit within our portfolio. Investing in innovation is our 2nd lever. Last year, we invested $1,800,000,000 in research and development.
As you have heard me say many times, research and development is the heartbeat of our company. It enabled us to both invent and manufacture cutting edge relevant and unique products for our customers. This in turn drives organic growth, which is our primary growth metric and also supports our premium margins and return on invested capital. Last year, in addition to investing in technology development, we took action to better connect our scientific capabilities to our customers around the world. We opened 6 new customer technical centers, including in West Europe, Middle East, Africa and Asia Pacific.
We also opened our new state of the art research laboratory in United States, which we look forward to showing you at our Investor Day in March. Our 3rd lever, business transformation, starts and ends with our customers. It's about transforming our business processes to make it easier and quicker for our customers to do business with us anywhere around the world. The backbone of business transformation is our new global ERP system. In 2015, we made good progress most recently with a successful rollout in the Nordic countries.
We also announced the creation of 3 global service centers, which will optimize our delivery of transactional services and serve as a broader platform for operational effectiveness into the future. We expect business transformation to result in a $500,000,000 to $700,000,000 in annual operational savings by 2020 and another $500,000,000 reduction in working capital. That covers our 3 levers and I'm very pleased with our progress in all of them. In addition to work we did on those levels, we made other investments to position 3 ms for success in both the short and long term. As we have talked about before, we run our company with one eye on the microscope and the other eye on the telescope or in other words, making sure we are positioned for success today and many years into the future.
Let me give you two examples. First, on the telescope view, we made a significant investment related to our brand equity. Our 3 ms brand is strong and last year we invested in a new brand platform, 3 ms Science Applied TO Life to make it even stronger. This will enhance awareness of how 3 ms uses science to solve problems for our customers, which go back to our vision of improving every company, every home and every life. Next, on the microscope view, we completed a corporate restructuring focused on structural overhead and slower growing markets, which will help us manage through the current economic realities.
And we made all these investments last year, while also return $8,000,000,000 to our shareholders through dividends and share repurchases. When I look upon all we accomplished in 2015, it was a fundamentally important year for the future of our enterprise. As you can see, we are continuing to build an even stronger, more competitive company that will win in 2016 and beyond. And on Slide 14, you will see our planning estimates for this year, which are unchanged from December's outlook meeting. We estimate earnings per share in the range of $8.10 to $8.45 an increase of 7% to 11% year over year.
Organic growth is expected to be 1% to 3% with acquisitions adding 1% to sales. Finally, we expect our free cash flow conversion in the range of 95% to 105%. With that, I thank you for your attention and we will now take your questions.
And our first question comes from the line of Scott Davis of Barclays. Please proceed with your question.
Hi. Good morning, guys. Good
morning, Scott. Good morning, Scott.
It looks like you were pretty aggressive in restructuring 4Q. Can you give us a sense of the payback? What kind of tailwind in 2016? And what impact on guidance, I suppose? And then just how much of that restructuring you think you have to continue to do in 2016 just given the relatively weak macro out there?
Scott, the restructuring that we announced in October during throughout the Q4, we executed that almost exactly as we laid out then. We're for the Q4, dollars 114,000,000 pre tax charge. And from that, we're expecting $130,000,000 operating income benefit in 2016. We expect that benefit to be pretty evenly loaded across the 4 quarters of 2016. And in regards to need for others, based on the outlook we have for the business and for the rest of 2016, we never say never, but we don't we're not anticipating anything at this time.
Okay. That's really helpful.
Scott, this is Inge. We just came off kickoff for the year under the theme of efficient growth. And I think it's important for us to say that as Nick said, you never know what you need to take for action. But my view is now with a range of 1% to 3% on the top line, even in the lower range of that, we should be able to prepare ourselves for when the market turn around and start to grow again. So I would like to have an efficient model where we can deliver now, but also be prepared as we see things start to turn around hopefully later in the year, but for sure you go into the future a couple of years.
So you're right. You never know if it's becoming tough or what you need to do. But I think with the action we took now at least I feel that we are prepared to deliver what we are telling you. And also equally important be ready to go offensive as soon as we see it's coming.
Yes. That makes sense. As part of the go offensive potential related to M and A, I mean, you still have plenty of balance sheet space. And I would assume given what's going on in the public markets that private market valuations are coming down a bit. Would you entertain getting more aggressive with M and A in 2016 if we're in a
soft spot that
gets tougher?
Well, the primary strategy for us is organic local currency growth. But I think we are willing and open to do things like we did in 2015. We did a couple of good acquisitions in 20 15 in order to build out our platforms both from a technology perspective, but also be more relevant in the market. So the answer to that is the pipeline is good for all businesses. And again, it's coming back to the valuation of the asset as we look upon them.
That's helpful. Okay. Good luck guys. Thanks. I'll pass it on.
Okay. Thank you.
Our next question comes from the line of Steven Whittaker of Bernstein. Please proceed with your question.
Thanks. Good morning, guys. Good
morning, Steve. Good morning, Steve.
Could you talk about the destocking impact within that kind of negative 2.3 percent? What are you seeing in the channels and sell insell out? And how much of a factor was that this quarter?
[SPEAKER STEPHEN ROBERT BINNIE:] When we look upon the inventory, you can say that consumer related businesses like health care and consumer, they're on a level that is very good, right? And you see the growth there. I would say that if you look upon industrial related businesses, there's maybe a couple of weeks, but not more than 2 of excess inventory in the channels as we see it. And if you go to consumer electronics, it's a little bit higher. And we estimate that maybe to be like maybe closer to 3 weeks of excess inventory at this point in time in the channels.
So let's say 2 plus in industrial related business and electronic and energy or consumer electronic And we don't see any issues at all in the Healthcare and Consumer businesses.
So that means unless things get worse, you'd expect that to be fully flushed out in this coming in the quarter we're in right now Q1 or Yes.
I don't know if I think we have to be careful on the industrial size businesses and consumer electronic. I don't know if you will be fleshed out in this coming quarter, but it should be if end markets come back a little bit, it's I would say it's you should think about it in the second quarter. When we look upon growth rate and I think Nick said that in consumer electronic and our business EBG, we see that growth rate Q1 be very similar to Q4, maybe slightly worse, but I would say similar. And for the company, we will compensate that through our Consumer and Healthcare businesses and a little bit more uptick in Industrial.
Okay. And on Page 5, the Productivity and Other contribution of 0%. I know that's ex restructuring down in the bottom. But maybe just talk through again, I think I missed or not sure why that's only 0?
Yes, Steve. That's a function partially of a lower growth environment that we're offsetting inflation that we're seeing there, but it's not enhancing our margin. It's tougher in a lower negative growth environment to be eking out productivity. Plus we used our levers of restructuring and which we called out separately with the 1.6% impact on the margin. So we executed strongly to adjust the cost structure, but in the end outside of the restructuring it had zero impact on our total margin for the quarter.
Right. Well, all the incremental or decremental leverage on the organic volume was at 20 basis, the 0.2% below that, right? Right. So this was just purely you're just saying you offset the wage inflation and that usually around a couple percent? Or is it much lower right now?
Total wage inflation is more in the 2% to 3% range.
Okay. All right. Thanks guys.
Okay. Thank you.
Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed with your question.
Thank you. Good morning, everyone. Good morning. I wanted to follow-up on Scott's question regarding has any of the year opening market volatility changed your plan to add incremental debt or any changes in your buyback strategy for 2016?
Yes. Dean, our strategy that we announced in December for incremental leverage and for gross share repurchases of that we announced that to be in the $4,000,000,000 to $6,000,000,000 range, Those remain unchanged for us. That's our plan. We think it continues to be the good and right plan for us for 2016.
Thanks. And Nick, maybe just walk through the I know seasonally you have strong Q4 cash conversion. This seemed even above that. Was that any working capital improvements? And then any comments on the hedging program?
How has it played out and with regard to expectations against this volatility?
First, Dean, on the free cash flow conversion, you know there's seasonality. The Q1 of any year is typically our lowest free cash flow conversion and the Q4 of the year is typically our highest free cash flow conversion. We saw that play out in 2015 and we'd expect that to play out in 2016. In particular, what you're seeing in the Q4, there's a couple of things. One is working capital.
We did a good job managing working capital throughout the Q4. And in addition, the restructuring expenses of $114,000,000 pretax much of that did not yet result in a cash outflow. That cash outflow will come in the first half of twenty sixteen. So we're seeing a little bit of movement between 2015 2016 there. As far as hedging, Dean, we continue to manage our hedging strategy as I've described in the past that over the next 12 months, we attempt to hedge approximately 50% of our economic exposure.
And then in certain developed currencies, we layer on additional hedges on a diminishing scale out into the 2nd and third year. That's playing out as we planned. For the total 2015, we had a hedging benefit of $182,000,000 And if foreign exchange rates stay where they are today that $182,000,000 will become approximately $160,000,000 for total 2016.
It's $160,000,000 to the good?
$160,000,000 hedge gain.
Got it. Thank you very much.
Thank you, Dean.
Our next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question.
Hi, thank you. So price cost was another good margin tailwind in Q4. I just wondered how you were thinking right now about the overall $0.10 to $0.15 raw materials boost and the EPS bridge you gave 6 weeks ago? And when you gave that guidance, how much of that $0.10 to $0.15 was assumed to come in the first half of this year relative to the second half?
Yes. Julian, we yes, the 200 basis points this quarter, I'll just make a little comment on that before I go on to the 2016. Of that 200 basis points, 110 basis points of that is coming from raw material commodity price benefits and another 90 basis points from increases in our selling prices. When we gave the guidance in December of $0.10 to $0.15 for raw materials, we were basing that on an oil price assumption of $45 to $55 a barrel. And we all know where oil is today of right around 30.
A rough ballpark for us is a $10 movement in oil helps us for an entire year by $0.02 to 0 point 0 $3 So our thinking right now is we're right about at the high end of that $0.10 to 0 point 15 dollars And at the time we guided this, in December, we saw virtually all of that benefit coming in the first half of 2016. We still see it heavily weighted to the first half of twenty sixteen, but we can see some of that benefit if oil stays in this range coming into the second half as well.
Very helpful. Thank you. And then my second question would just be around Electronics and Energy, where you talked about portfolio management actions in renewables reducing the margin by 240 points.
Maybe just give maybe I missed
it in your prepared remarks, but could you give some more color around what's happening there?
Yes.
As you have seen, we are taking action for quite some time now in order to prepare that business really for the future. And I think we have been successful for that relative to margin expansion and also growth rates. And as I said on the other calls, what I feel very good about is that that model now will deliver very solid margins even in a tougher economical environment with slower growth. And we have proven that, so I feel very good about that. This quarter, we took actually write off on an asset we had that didn't make sense any longer for us.
And we asked because we had a quarter here where we could do it and the strategic importance of that asset to us, it was not there any longer. And I'm very, very keen to prepare that business for an even stronger future. So it was based on the asset that we took a write off of.
Off. And then lastly, very quickly, organic sales in Q1 overall 3 ms firm wide, should we assume it's about the same or a little bit worse than the minus 1% in Q4?
We say that as we said earlier, I will assume be equal to Q4. And then we will see how it play out in between the different businesses, right? For me, it looked like and for us, it looked like HealthCare and Consumer will continue with an accelerated growth. And I'm very we are very pleased with that because that's again showing the strength for us in our diverse portfolio. And also when you look upon the margins that is good, right?
There's very, very good margins in health care. And as you have seen in consumer really improved the margins the last couple of years as well. I would say that electronic and energy is probably the business in consumer electronics specifically that then will be similar to this quarter maybe slightly down in that segment specifically. But I would say think about it as 3 ms as an enterprise very similar to Q4 in Q1 of this year.
Great. Thank you.
Thank you.
Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question.
Good morning, guys.
Good morning, Shannon.
Hey, in the Healthcare business, drug delivery was up this quarter. I mean that's I think been a drag for a while. Is that now turned around? And what's your view on that piece of the business for 2016?
Well, that business is very much project based. So it would go a little bit up and down. But we will see slightly better growth rate in 2016 versus 2015. And again, as you recall, this quarter or you mentioned, this quarter shows slight growth versus where we have been in last three quarters in a tougher situation. So again, based on what we see in the pipeline, we are more positive on that piece of the business for 20 16 versus what we were able to deliver in 2015.
So your observation is correct. And I would say your assumption moving forward, we hope that you're correct on that as well.
Okay. Thanks. And then just on Europe, I mean, it's something I think last year you were kind of expecting to improve through the year, maybe came a little lower than you thought originally. What's your updated view on what you're seeing there and your expectations for Europe and then getting incrementally more encouraging or less encouraging?
Yes. Europe for a long time have been a challenge relative to growth rate in the market, right? And we have taken action very much on the efficiency part and the productivity part. As you saw when you added it together now, there was a growth of Europe, Middle East, Africa. But the three pieces is that Middle East, Africa down, Central East Europe up 8 percent and slight up in West Europe.
So West Europe, yes, slight growth. And I think that would be very dependent on how Germany can come off in 2016. And we have also to think about it that Central East Europe that growth rate was very much price that came out from our action we took in Russia. So Central East, Europe, Middle East, Africa take that portion of it. It's generally speaking, it's a challenging environment geopolitically that we then have to be careful of.
And West Europe, you see some spots of growth. But I think the very important thing there is that Germany, the machine of Germany, start to deliver a little bit more growth. And maybe we can see a little bit more there. But I think we are well prepared in that part of the world due to work that we have done for the last I have to say maybe the last 5 years of streamlined organization, taking out structure bigger span of control and lower levels in the organization etcetera in terms of management. Still kept focused on our execution around commercialization as you have so many different languages as you know over there.
So you need to be very nimble and fast in execution in each country and then that will reduce management structures as much as you can.
Okay, great. Thanks.
Thank you.
Our next question comes from the line of Jeffrey Sprague of Vertical Research Partners. Please proceed with your question.
Thank you. Good morning, everyone.
Good morning, Jeff.
Good morning.
I was wondering if you
could come back to price and Inge. You mentioned that what percent of your price is kind of actions that are countering FX kind of like you mentioned in Russia, I'm sure, versus like for like price? And maybe speak to the ability to get like to like price in this environment?
Jeff, I can speak on this both for the quarter and the year. It's a similar story. About 75% of our total reported price growth is in direct or indirect response to FX movements, primarily in developing markets. So if you look at our 120 basis points, about 3 quarters of that directly a result of FX movement. Our core ability to impact price excluding FX has ranged in the 30 to 50 basis points and we continue to see that range going forward for the company that into 2016.
The delta on top of that is will be dependent on what happens with FX movements. But 30 to 50 of core and then whatever on top of that that may happen if FX rates move even more than what we laid out in December.
Great. And we should assume that the write off you took is equivalent to that 2.4 points of margin pressure in E and E. Is that correct?
Yes, Jeff. That's exactly correct.
Okay.
And then just finally, could you just speak to the actual kind of direct indirect oil and gas exposures that you do have in industrial and S and S and how you see that playing into the early part of the year especially?
Okay. So and Jeff, to be clear, you said in Industrial and Safety and Graphics?
Yes. I'm thinking within safety kind of fall prevention and protection gear and things like that. And then obviously in industrial, you've got some.
Yes. Some of our direct exposure is what we're selling through the personal safety line. And what I'll say to that is, as 2015 progressed, we probably didn't see a lot of impact in the first quarter and then that grew for us in 2015 then the second through Q4. We continue we expect that to continue into the first quarter of 2016. And there'll still be some negative impact after that from oil and gas, but we think the worst of the comps will be behind us from oil and gas after the Q1 and then diminishing the rest of the year.
Probably a similar comment for the industrial portion. We have some of our advanced materials that are impacted by that go into the oil and gas industry. And then we also have some exposure in our Electronics and Energy business. And the comps for that we think for the Q1 for sure possibly in the Q2 we'll still be seeing some challenge there. Jeff?
Jeff to put a number on it at a total company level, if you took the businesses directly linked to oil and gas, it would be about 3% of our sales. Just as with the economy, any knock on effects of a slower oil and gas market clearly are impacting the economy, but the direct exposure to oil and gas will be about 3% for us. Great. Thank you for that color. Appreciate it.
Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question.
Good morning. Hi. Just wanted to go back to Nick's comments on price, 30 bps of core price plus whatever the FX movements are. But obviously, you don't have price baked into your 16 bridge explicitly, but I'm assuming that's part of your organic. So I'm just wondering, do you have what right now 50 bps of price within the organic bridge?
Nigel, in our guidance, the way we said it, we expect 1% to 3% organic, the vast majority of that volume. So 30 to 50 basis points of price in that 1% to 3% total organic growth.
Okay. That's helpful. And then just wanted to clarify the impact of acquisitions and disposals on Safety and Graphics. So obviously, strong margin performance there. But is the benefit from disposals because the library systems business was so much lower margin?
Or is there a small gain now? Or is it both of those factors?
Nigel, we divested of 2 businesses in Safety and Graphics in the Q4, our library systems as well as license plate converting business in France. The net impact of those 2 resulted in a small gain accretive to our earnings per share of approximately $0.015 The rest of the total impact of M and A on Safety and Graphics is our acquisition of Capital Safety doing a little better than what we had
been projecting. Okay. That's very helpful.
Thanks very much. Thank you. Of
JPMorgan
of JPMorgan. Please proceed with your question.
Hi, good morning.
Hi, Steve.
Just looking at the bridge on Slide 6, I think for basically just trying to kind of understand the seasonality and kind of sequencing using those buckets. Probably not a ton of change in tax and foreign exchange. Those are probably pretty straightforward. What is the M and A contribution
Steve, for the total year, we guided approximately $0.10 benefit. Our view is that that will be quite evenly distributed over the 4 quarters. So for the Q1, roughly 1 quarter of that $0.10 benefit. And that's inclusive of the impact of the most recent portfolio action that we announced a few days ago with a small business in our industrial business.
Okay. Got it. Makes sense. So I guess when I kind of add these items up and I'm not really asking for precise guidance here, but you guys are calling for 7% to 12% EPS growth over the course of the year. Is that is every quarter kind of within that range or with a little bit lighter organic, is that enough to kind of get you below the low end of that range for the Q1 year over year?
Steve. It tries to get us in to give quarterly guidance, right?
Well, I think it's good to calibrate this stuff with the sequencing of what's happening in the year organically.
Steve, we've talked about the organic growth that we're expecting in the Q1. That is a quarter that I would expect will be more challenged also from an earnings per share growth. Everything else being equal, there's not one outlier that will compensate for the what we've already said about the organic growth in the Q1.
Right. Okay. That's kind of what I was getting at. Great. And then one last question just on the balance sheet.
I know in prior years you guys have kind of toggled up the repurchase at some in some instances. I mean are you given that you're kind of an end at the end of your most recent kind of 5 year plan, should we think about buybacks as pretty much set? Or could you kind of toggle that up like you've done in past years from your standing 2016 guide at some point? What's the appetite there?
Yes. Our appetite is pretty well reflected by the 4% to 6% guidance that we've stated. I will reiterate our approach is there's a certain amount where we're in the market every day of buying and then there's a portion that we are flexing up and down depending on the relative value we see of 3 ms stock. And we'll continue to follow that playbook in how we repurchase our shares in 2016. Great.
Thanks a lot.
Thank you, Steve.
Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Good morning, guys.
Good morning. Hi, Andrew.
Hi. Just a question on Electronics and Energy. How much visibility forward do you have on this whole smart phone situation? Because it's one of the concerns we've been hearing from investors that being a disproportionate hit on your business.
We have as you know, we work on those platforms daily with our customers. So I think that when we have laid out our plan for the year, we have good understanding relative to when new introductions will come and our position on them. And we have a good position there as you know. We got a hit now of course not because of that we were spec'd out or lost anything just because that the market was down. And it's estimated to be down in Q1 as well as you have seen in media.
And I think we will see an uptick coming in the second half of the year hopefully with orders coming in I would say in terms of end of Q2 is where we will start to see orders coming into us for launch later in the year.
And can you help to frame the risk from technological disruption? Also been getting questions on transition to OLEDs and how that impacts the business because I think people remember what happened a decade ago with flat screen TVs and try to draw a parallel here.
Yeah. Well, we are aware of competition in terms of technologies to LCD such as OLED, which is the one you referred to. And we have known that for a long time. That's also one of the reasons why we realigned our organization to form our Display Materials and System business in early 2014. And there's an integration of those businesses into what I would call display technologies, which is a goal for the future for us to expand into.
And we have already products that is going into equipment that are using OLED. So we are not behind in any ways. We have on every I would say every equipment today that are using OLED, we have multiple applications in them and there's more to come in that area. But we have been working on this area for quite some time. And that's part of our model, right?
That's why I would say the strings of 3 ms to our technology platforms, this is exactly where it is, right? So there's I see more opportunities as you go ahead over the longer term as we are working with our customers on it.
Thank you very much.
Thank you.
Our next question comes from the line of Andy Kaplowitz of Citi. Please proceed with your question.
Hey, good morning, guys. Good morning, Andy. Obviously, some good margin performance in Industrial and Safety and Graphics despite lower organic growth. So as you go through the year, how much ability do you have to keep margins up even with the headwinds that you've seen? I know you had guided to about 150 basis points of margin improvement for the company for 3 ms in 2016.
When you had your guidance call, is that still what you expect within the guidance?
Yes. Andy, that $150,000,000 that's still a good ballpark. There's a lot of things that are going into that including our estimate of 1% to 3% organic growth. Some productivity coming from things such as our business transformation investment, our pension expense as well as some strategic investments. All in, we're seeing many of those things play out exactly as we guided in December.
The $150,000,000 is still a good number.
Okay. That's helpful. And your consumer businesses were strong in the quarter. Maybe they slowed a little bit versus last quarter and year over year growth. So just the resiliency of the consumer right now, it seems like the consumer is still pretty strong, but your view?
Yes. It is very strong. And I think there is a couple of things that is important to think about relative to 3 ms and our position in the market. We have we are very strong in United States in our consumer business. So we have a stronger and better penetration in United States than we have outside of United States.
So that is also then talking to our opportunities as we move ahead to expand more with consumer outside of United States. If you look upon United States specific and you look upon data and facts which will is a key indicator for us relative to potential growth rates. We all know that there is a challenge on IPI as we go into 2016. And the fact that it's saying that this is slower Q1, Q2 maybe Q3 and then Q4 it will pick up again on IPI year over year. If you look upon retail sales index, it's actually different.
It's very robust as we go in already to Q1 and Q2 and for the rest of the year. So I would say that all business days is in a good position and we feel very good about it. We have very good brands. We have very we add a lot of value into the channels and we are managing a lot of categories in that business. The same goes for health care.
Health care is the same. Health care for us in I'm not talking U. S. Versus outside of U. S.
There. I talk about developed economies versus developing economies. And 80% of our portfolio in health care is in developed economies, meaning developing is still a huge opportunity for us. And we are growing very well there and our margins are very high. So I think that's coming back to in times like this where you see some challenges in some economies around the world if that's in industrial or electronics or even in safety.
We have the advantage that we have domestic driven businesses in consumer and health care that this carries on. And so that this quarter again, health care had almost 5% organic local currency, the strongest for the year and with margin expansion. It's just a fantastic business for us and the same go for consumer. So we feel very, very good about them and it's sustainable. I think that's the important thing that it is a sustainable business model for us based on world class product solutions.
Thanks guys.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Thanks. Good morning, guys.
Good morning, Joe.
So two quick questions. Maybe focused on your industrial business for a second, Inge. You've had some distributors recently talking about improving short cycle trends in January and there's been some green shoots that we're seeing as well out of the semi sector. Just wondering, is there anything across your industrial business today where you're starting to feel better about things incrementally? Or is it still the trends are still very similar to what we've been feeling over the last 6 months?
No, I don't I would say that there are certain pieces in our business that are doing very well. And I can 3 ms purification is doing extremely well at a growth rate in the quarter of 10% and for the full year 8%. Automotive OEM is doing very well for us. Had a growth in the quarter of 7 and in fact for the whole year is around 7%. And then I think that some where the pressure is just now is I would say general manufacturing.
And then that go broad based, right? But I don't I will not say short term. As we're talking here the next quarter or next 5 months, I don't see that we will see a big tick up. I think it will be very similar in Q1 versus Q4. But some businesses doing very well.
Automotive OEM and purification doing extremely well. But we have also to think about it in terms of growth on a global base. So United States that was pressure this quarter down 6%, but we were growing in many other cases around the world. And I think that's important to think about in terms of us as a global growth company. So we had organic growth in India, China.
We grew 6% in China. If you think about that it's a big market, 2nd biggest subsidiary for 3 ms outside of United States and the 2nd biggest economy in the world. Still for us our industrial business in the quarter 6% growth. We had 3% growth in Japan and United States was an issue. So I think we have to balance it out in terms of how we look upon the future here.
And we have decided and we are a global growth company. So I would say that as you go into the year, we will see we should see an uptick coming into the second half of twenty sixteen for industrial.
That's really helpful color, Inge. And maybe my follow on for Nick. Now that the restructuring is done at least the cost actions have been taken in 4Q. Any additional color you can give us on the cadence of the restructuring? I know it's going to be the restructuring benefits.
I know it's supposed to be second half weighted, but any additional color would be great.
Yes. Joe, the benefits in fact will not be second half weighted. From a comp standpoint, yes, the fact that charge all came in the Q4 of 2015, but the actual benefits going forward will be quite evenly weighted across the 4th quarters of 2016.
Great. That's great color. Nice job executing this tough environment guys.
Thank you. Thanks, Ciao.
And our final question comes from the line of Laurence Alexander of Jefferies. Please proceed with your question.
Good morning. Two quick ones. Just wanted to flag on auto OEM, are you seeing any soft spots around the world? And secondly, as you look at your share gains, do you see those as sustainable? Or is that a procyclical phenomena that is as end markets improve your pace of share gain slows down?
Yes. So they are sustainable. If you think about it, you're going to look upon the fact we have now for 3 to 4 years outgrown the automotive production on a global base. So our growth is always more robust than the total output of cars produced. That is indicating that we penetrate and take more application per car And that is sustainable by definition due to the fact that we provide solutions that is helping automotive industries with technology conversion.
So we don't view us as a commodity player that is coming in and just try to replace someone. For us, it's about technology conversion moving you to the next level on your specific retail in order for you to be able to compete in the marketplace. So that is sustainable by definition and that's what 3 ms is all about. I would not say that today that I see any differentiation where someone becoming much, much stronger geographically, some other weaker geographically in terms of production of cars. And that is what we play, right?
We design in and spec in always at the headquarters of companies, if that's in Germany, Japan or United States. And then where the car is produced, that is where we have the teams to put the application in place. So that's about development and deployment. And I don't feel there's any differentiation there on a geographical base, But our model is sustainable.
Thank you.
Thanks, Lawrence.
That concludes the question and answer portion of our conference call. I will now turn the call back over to Ingo Tullin for some closing comments.
Thank you. To wrap up, 2015 was an important year for 3 ms as we efficient growth and create greater value for our shareholders in 2016 and beyond. I thank you for joining us and we look forward to seeing you all here in St. Paul in March. Have a great day.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.