Ladies and gentlemen, thank you for standing by. Welcome to the 3M 2016 Outlook Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we'll conduct a question and answer session. At that time, if you have a question, please press the one followed by the four on your telephone keypad. It is recommended that you use a landline phone if you're going to register for a question. As a reminder, this conference is being recorded Tuesday, December 15th, 2015. I would now like to turn the call over to Matt Ginter, Treasurer and Vice President of Investor Relations at 3M.
Thank you. Good morning, everyone, and welcome. On the call today are Inge Thulin, 3M's Chairman, President, and CEO, and Nick Gangestad, our Chief Financial Officer. Each will make some formal comments, then we'll take your questions. Today's press release and slide presentation are posted on our investor relations website at 3m.com. Please turn to slide number two for a reminder of some upcoming 3M investor events. On March 29th, we will be hosting an investor day at our headquarters in St. Paul. During this event, you'll have a chance to hear from a variety of 3M leaders. We also plan to showcase our new state-of-the-art R&D technology center. We expect to introduce a new five-year plan through the year 2020 in conjunction with this event. I hope you can join us.
Note the dates for next year's quarterly earnings calls, scheduled for January 26th, April 26th, July 26th, and October 25th. Please take a moment to read the forward-looking statement on slide three. During today's conference call, we will make certain predictive statements that reflect our current views about 3M's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10-K lists some of the most important risk factors that could cause actual results to differ from our predictions. If you'd please turn to slide four, I'll hand off to Inge.
Thank you, Matt. Good morning, and thank you for joining us today. Today, we will lay out our outlook for 2016. Before we address next year, however, I will make some comments about the current state of 3M and how we are building a company that is positioned to drive efficient growth both today and into the future. Please turn to slide five. At 3M, we are guided by our vision, which is inspirational and something for us to reach for. It lays out how we are striving to advance, enhance, and improve every company, every home, and every life. We do that through technology, products, and innovation. We complement our vision with six strategies, which are operationalized throughout the company. The first four strategies focus on growth, the fifth is around people, and the last strategy is around operational excellence.
Our team's relentless focus on operational excellence has been critical throughout 2015 and will continue to support our success in what we expect to be another slow growth environment in 2016. On slide six, you see our entire playbook, which we're executing in order to create more value for customers and shareholders. In addition to our vision and strategies, we also have laid out six leadership behaviors, along with our code of conduct, which defines how we live and work. Our commitment to doing business the right way is constantly reinforced throughout our company. Finally, our three key levers, portfolio management, investing in innovation, and business transformation, represent three big value creators for our enterprise, and I will go into more detail on those later. Please turn to slide seven.
As always, we are focused on executing our playbook, making investments for the future, and managing those things within our control. In other words, controlling the controllable. This is evident in our 2015 performance, which is marked by efficient growth and strong execution. Through three quarters, we have increased company-wide margins a full percentage point to 23.7%. Our margin strength is broad-based across the portfolio, ranging from 22% in Electronics & Energy to 32% in Health Care. Premium margins are a hallmark of our company, which we are able to deliver even in a low-growth global economy. In 2015, we're also generating strong free cash flow, and we expect our full-year conversion rate to be approximately 100%. This is allowing us to invest in the business and also return cash to shareholders.
As a reminder, our company has paid dividends for 99 consecutive years and increased that dividend for the last 57 years. Please turn to slide eight. The foundation of our company's history of success is our fundamental strength, and they will continue to propel us into the future. This chart illustrates a vertical and horizontal business model built around technology, manufacturing, global capabilities, and brands. Our four fundamental strengths allow us to successfully invent, build, and market products throughout our vast global network. We are constantly investing in those capabilities to position us for success. Please turn to slide nine. At 3M, we are never satisfied and we are always building strengths on strengths across our enterprise. This includes actions to increase our relevance to customers, enhance the effectiveness of our investments in research and development, and expand our market presence through mergers and acquisitions.
We're also taking actions to standardize global business processes and reduce structural overhead in order to move to a more efficient business model. Let's move to slide 10. Three key levers are driving those investments and position us to win in both the short and long term. In 2015, we have made significant progress on each of these levers. First is portfolio management, starting on slide 11. Back in 2012, we began taking action to prioritize strengthening and focus our portfolio of businesses. We have since realigned from six sectors to five business groups and from 40 businesses to 26. This year, for example, we combined our dental and orthodontic businesses within our Health Care business group. Now, through a single and seamless partnership, we can offer customers an array of oral care innovations.
Combining and realigning businesses is delivering significant benefits, including greater customer relevance, scale, productivity, and of course, improved speed. It is also making our company leaner and better positioned to allocate resources to our best opportunities as it relates to both organic growth and acquisitions. On slide 12, we will cover our recent M&A activity. An important aspect of our portfolio management is acquisitions which complement organic growth and create greater value for our shareholders. As you see, in the last few years, we have completed a number of significant acquisitions. Most recently, in the third quarter, we finalized the acquisitions of Capital Safety and Polypore Separations Media business. These deals will enhance two of 3M's core platforms, personal safety and filtration. The integration of those businesses remains on track. At the same time, we sell businesses that no longer fit within our portfolio.
In the fourth quarter, we have closed two divestitures, both within our Safety and Graphics business group. Early in the year, we also completed the sale of our static control business. Ultimately, we determined that selling these businesses will result in the greatest value creation for our company. Please turn to slide 13. At 3M, managing and evaluating our portfolio is a constant and ongoing process. Right now, as you know, we are exploring strategic alternatives for our Health Information Systems business. This is a healthy, growing business and an industry leader in healthcare coding, software, and analytics. Options include spinning off, selling, or keeping the business. At the end of our evaluation, we will choose the best path to benefit 3M, our stakeholders, and the business itself, and we anticipate a decision to be made in the end of the first quarter 2016.
Our second lever is investing in innovation, found on slide 14. Research and development is the heartbeat of 3M. It fosters a constant stream of unique and cutting-edge products, which drives organic growth. R&D is also key to sustaining our company's premium margins and return on invested capital. That is why we continue to invest in R&D while strengthening our ability to leverage insight from both customers and the marketplace. These insights are key to our success, and they allow us to connect our company's 46 technology platforms to real-world needs and opportunities. Just this year, we opened customer technical centers in Australia, West China, Italy, and Turkey, where our local teams work directly with customers and their challenges. Megatrends is, of course, also a guide for our innovation. Globally, for example, rapid population growth in urban areas is creating challenges related to energy efficiency, clean water, and environmental protection.
Right now, we are building an urban solutions laboratory in Singapore, as population growth in Southeast Asia is having a major impact. There, our local scientists will leverage our technologies to develop relevant solutions which are unique to that region. At the same time, we are now moving scientists into our new state-of-the-art corporate research lab here in St. Paul that I hope you all can come and see in March. They will further develop and refine the company's technology platforms, where we'll boost our 3M laboratories around the world. Investing in research and development is all about building strengths on strengths so we remain a world-class scientific powerhouse. Please turn to slide 15. We're also moving to a more efficient business model throughout our third lever, which we call business transformation. This will increase productivity while allowing us to serve customers with greater speed and efficiency.
The backbone is a global ERP system, and we are making good progress. Our team is currently executing our deployment plan across West Europe, and in the third quarter, we successfully rolled out in the Nordic countries. In August, we also deployed the ERP system in our new global service center located in Wroclaw, Poland. The three service centers we are opening globally, which will optimize our delivery and transactional services, resulting in a lower cost and greater value creation. Business transformation is an important undertaking with significant long-term benefit. We expect $500 million-$700 million in annual operational savings by 2020 and another half a billion annually reduction in working capital. I wrap up my formal comments on slide 16. As you can see, we are building, preparing, and positioning 3M for an efficient growth today and into the future.
As I look across our enterprise, the playbook is working. We are controlling the controllable and making investment for long-term success. As a result, I continue to grow more confident in our enterprise, and I thank the 3M team for their contribution. Now, I will turn it over to Nick, who will go through our outlook for 2016. Nick?
Thank you, Inge, and good morning, everyone. Please turn to slide 18. Before I address the 2016 outlook, let me provide a few comments as we close out '15. Global end market demand continues to be soft, as reflected in declining macroeconomic forecasts, a trend that has had a notable impact on our Industrial business, particularly in the U.S. We are also seeing weaker than expected demand in the consumer electronics market, which is impacting our Electronics & Energy business. Today, we are updating guidance for the full year. We expect organic local currency growth to be approximately 1% versus prior guidance of 1.5%-2%. As a result, we forecast full-year GAAP earnings to be approximately $7.55 per share versus a prior range of $7.60-$7.65.
As Inge mentioned, we now forecast a full-year free cash flow conversion rate of approximately 100% versus a prior range of 95%-100%. On the Q3 earnings call, we announced a corporate restructuring plan which will be completed by the end of the year. This action will result in a fourth-quarter pre-tax charge of $100 million or approximately $0.14 per share. Let's now look to 2016, starting on slide 19. As Inge said, heading into next year, our teams will continue to be focused on executing our playbook, controlling the controllable, and making investments for long-term success. We expect positive but slow economic growth in 2016. Once again, our ongoing emphasis on operational excellence will help us deliver another year of efficient growth. We expect 2016 earnings per share to grow between 7% and 12%, with approximately 80% of this growth coming from operations.
As always, investing in the business remains our top priority. This includes CapEx and R&D, which drives organic growth, as well as strategic acquisitions, which complement organic growth. At the same time, we will continue to invest in productivity to improve operational efficiency across the company. Finally, we continue to make progress to optimize our capital structure while maintaining flexibility to respond to strategic opportunities. Please turn to slide 20. On this slide, you see a summary of our 2016 planning estimates. We are expecting GAAP earnings to be $8.10 to $8.45 per share. This is a 7%-12% increase in earnings per share, primarily driven by operations. We expect organic local currency growth to be 1%-3%. Foreign currency translation will remain a headwind and reduce sales in U.S. dollars by 1%-3%. Acquisitions net of divestitures will add 1% to sales growth in 2016.
We expect our tax rate will be 29.5%-30.5%. Finally, we anticipate another strong year of free cash flow generation with a conversion rate of 95%-105%. Turn to slide 21. Here is our 2016 capital allocation plan. We generate strong and consistent cash flow due to the strength and diversity of our business model. For 2016, we estimate $12.5 billion to $15 billion of available capital, which includes added leverage of $2 billion to $4 billion. The first priority is to invest in our businesses, while at the same time returning significant cash to shareholders. In the following slides, I will go into more detail on each element of our 2016 earnings per share walk. Please turn to slide 22. Organic growth remains the primary growth metric for our company.
In 2016, we expect organic growth in the range of 1%-3%, which translates to an earnings increase of $0.10 to $0.25 per share. We expect second half growth to be stronger than first half, with growth largely driven by volumes. The first quarter comp will be the most challenging in 2016, particularly in Electronics & Energy and Safety and Graphics. For reference, we estimate that the global industrial production index will grow 1%-2% next year. In developing markets, we expect to generate organic growth of 2%-6%, with flat to 2% growth in developed markets. Please turn to slide 23. Let's now look at organic growth estimates by business and geography. We expect our Health Care and Consumer businesses to lead our organic growth, with Health Care up 3%-5% and Consumer increasing 2%-4%.
We forecast organic growth in the Electronics & Energy business to be in the range of -2% to +2%. Finally, organic growth in our industrial-related businesses, namely Industrial and Safety and Graphics, is estimated to be flat to +3% in Industrial and up 1%-3% in Safety and Graphics. Breaking the growth down by geographic region, we estimate the U.S. will grow organically between 1% and 3% next year. Organic growth in EMEA is expected to be in the range of -1% to +2%. In Asia Pacific, we anticipate 1%-4% organic growth, with both China and Japan in the low to mid-single digit range. Finally, Latin America Canada is expected to grow between 1% and 4%. Next, I will walk through investments which support and drive organic growth into the future. Let's start with CapEx on slide 24.
A strong enabler of organic growth is our continued investments in capital equipment and manufacturing process technologies. Over the past three years, we have specifically increased our investments in automation to advance product quality and increase productivity. We deploy CapEx in alignment with our portfolio prioritization process, thus ensuring we are investing fully in our most promising growth opportunities. Historically, our CapEx investments have been around 4.5%-5% of sales. We expect this trend to continue during 2016, with an estimated CapEx investment of $1.3 billion-$1.5 billion. Please turn to slide 25. Like CapEx, R&D investments also enable us to drive efficient growth and consistently deliver premium margins and return on invested capital. As a science-based company, our ability to create unique, relevant, and cutting-edge products is foundational to our success. That is why we continue to invest in R&D, even when the external environment becomes more challenging.
This is a significant part of our commitment to building 3M for both short and long-term success. In 2016, we expect to invest approximately $1.8 billion in R&D. Please turn to slide 26. Acquisitions and divestitures strengthen and focus our portfolio of businesses. In 2016, we expect acquisitions, net of divestitures, to add 1% to sales growth and boost earnings by approximately $0.10 per share. The sales and earnings impact is driven by the 2015 acquisitions of Ivera Medical, Polypore Separations Media business, and Capital Safety. It also includes the impact of selling our Library Systems and French license plate converting businesses earlier this quarter. Looking forward, the acquisition pipeline is healthy and we are actively reviewing and prioritizing opportunities. Please turn to slide 27. Let's now look at the earnings impact of foreign currency.
As highlighted earlier, we expect foreign currency translation to reduce sales in U.S. dollars by 1%-3% in 2016, which will reduce earnings by $0.20-$0.30 per share. This estimate includes the impact of foreign currency on translation and intercompany purchases, net of hedging gains. With respect to hedging, we take two approaches. Our primary strategy is natural hedging. This means optimizing our supply chains and moving operations closer to our customers around the world naturally reduces our currency exposures. Our other strategy is financial hedging, which is meant to provide our businesses time to adjust to a sustained change in currency rates. We hedge approximately 50% of our economic exposure on a rolling 12-month basis and also have additional hedges as far out as 36 months in the most liquid currencies at gradually diminishing levels. Please turn to slide 28.
In 2016, we anticipate raw materials to benefit earnings by $0.10-$0.15 per share, with the majority of the savings coming in the first half. These expected savings are driven by a number of factors. Most notably, market prices for many of our inputs have continued to decline, and our global sourcing teams are generating additional savings above market. Please turn to slide 29, where we will cover restructuring. As I mentioned earlier, we are on track to complete our corporate restructuring plan by the end of this year. We estimate these actions will increase earnings by $0.25-$0.30 per share in 2016. The EPS impact includes the non-recurring pre-tax charge of approximately $100 million in the fourth quarter of 2015 and pre-tax savings of approximately $130 million in 2016.
As a reminder, the restructuring plan is focused on structural overhead, largely in the U.S. and slower-growing markets, with particular emphasis in EMEA and Latin America. These actions align with our ongoing efforts to strengthen competitiveness by becoming an even leaner, more efficient, and more agile company. Please turn to slide 30. Driving productivity each and every day is a way of life at 3M. On top of the restructuring savings, we expect additional productivity efforts to contribute up to $0.10 to earnings per share in 2016. We estimate that approximately half of the additional productivity benefit will come from business transformation. We also continue to drive Lean Six Sigma company-wide, with emphasis in our manufacturing operations and global supply chains. Please turn to slide 31. During 2016, we expect strategic investments to reduce earnings by $0.15-$0.20 per share.
A part of our business model is to continuously reinvest in the business to enable even more growth and productivity. These investments will support ongoing portfolio efforts to enhance our ability to serve markets and customers, while also streamlining and simplifying operations. Please turn to slide 32. Pension will become an earnings tailwind in 2016 in the range of $0.25-$0.35 per share. Two-thirds of the benefit is due to the adoption of the spot rate method for accounting purposes. This method is considered to be more precise in measuring pension service and interest costs. The other one-third is driven by increased interest rates year on year and design changes to post-retirement benefit plans. We estimate year-end 2015 worldwide pension OPEB funded status will be 85%, with the U.S. pension plan at 91%.
2016 cash contributions to our defined benefit plans are expected to be in the range of $100 million-$200 million, similar to recent years. We have closed most of our defined benefit pension plans around the world and have migrated to defined contribution plans to meet changing employee preferences for greater flexibility and portability. Please turn to slide 33. Let's now discuss 2016 net interest expense. As I mentioned, we continue to make progress to better optimize our capital structure and lower our cost of capital. As part of that plan in 2015, we will add approximately $4 billion of debt. In 2016, we expect to add an additional $2 billion-$4 billion of leverage, which is net of $1 billion of debt refinancing. As a result, we expect net interest expense will go up in 2016, reducing earnings by $0.10-$0.15 per share.
Please turn to slide 34. Regarding taxes, we anticipate our tax rate to be between 29.5% and 30.5% in 2016. This will result in an earnings headwind of -$0.05 to -$0.15 per share. We continue to optimize our supply chain and utilize centers of excellence to increase efficiency and to drive down the structural tax rate. These efforts are being offset by the strong U.S. dollar, which has shifted a greater portion of earnings into the U.S. Our tax rate guidance assumes renewal of the R&D tax credit in 2016, consistent with our assumption for 2015. Please turn to slide 35. Finally, let me wrap up my formal comments by covering cash returns to shareholders. 3M has a long history of paying dividends. In 2015, we increased the dividend by 20%, which was on top of a 35% increase in 2014.
As a result, we have increased our dividend payout ratio to approximately 54% this year, up from 37% in 2012. Looking ahead, we expect the dividend to grow in line with earnings over time. Please turn to Slide 36. For 2016, we are forecasting to deploy $4 billion-$6 billion of cash toward gross share repurchases, or $3 billion-$5 billion net of reissuances. This will reduce average diluted shares outstanding by approximately 4%, which will increase earnings by $0.25-$0.35 per share. Please turn to Slide 37, where I will recap our EPS roadmap. This slide shows all the components of our EPS expectations for 2016, which I just covered. As you can see, we expect earnings growth to be driven primarily by operations as our team continues to execute our plan and control the controllable. Please turn to Slide 38.
In summary, we are positioned for a successful 2016, including strong earnings growth in the face of a challenging global economy. Equally important, we will continue to make investments to strengthen our foundation for long-term success. Thank you for your attention. We will now open up the meeting for Q&A.
Ladies and gentlemen, if you would like to register a question using a landline phone, please press the one followed by the four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please lift your handset before entering your request. Please limit your participation to one question and one follow-up. One moment, please, while we compile the Q&A roster. Our first question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question.
Yes. Two-part question. Good morning.
Good morning, Andrew.
Morning, Andrew.
First question. Just lowering guidance. We still haven't finished Q4. Can you just be more specific as to where are you seeing headwinds, specifically by geographies or markets?
Yes, Andrew. As I said earlier, it does reflect the reality globally of what we're seeing. We're seeing particular weakness in industrial-related businesses in the U.S. We're also seeing weaker than expected demand in consumer electronics. For the quarter, we're estimating organic growth in Electronics & Energy to be down high single digits, and we're estimating Industrial and Safety and Graphics to be down low single digits. Our Health Care and Consumer businesses, we're continuing to see good performance, Andrew.
Just another question, if I understood correctly. You had your 2013 to 2017 five-year plan, and you're talking about rolling out new plan in 2016. Does that mean we're sort of scrapping the old five-year plan and just going to roll out new targets? Am I understanding this correctly? Sorry.
Well, we were talking about the new five-year plan, right? As you recall, the way we lay out the plan in 2012 with the targets around free cash flow conversion, return on invested capital, EPS growth, and organic growth. I think we are on track relative to that plan, generally speaking. With a couple of metrics actually ahead, free cash flow conversion and return on invested capital, we are ahead on that. I would say as you look forward now, as the world has changed a little bit. There'll be more of a challenge for most people around growth, as you know, right? I think it's time for us to look upon the target as we move ahead. I think March is a good time for us to do that.
With that said, I'm personally very pleased with how we are operating and the way the playbook is working and so forth. I think specifically around the growth portion, right? The expectation in 2012 back then was slightly different than it is today, right? We can even see some changes around the world just the last year or maybe the last six months. As you know, if you look upon what was expected then from developing world versus what we see and developed world versus what we see, right? We have all been around long enough to see there's been a shift in the last three years. I think we also would like to make sure we all understand it and that we put the resources at the right place and you guys also know what to expect for us as we move forward.
I am very encouraged about the plan that is in place and executed. We have made some shifts, positive shifts, I would say, in our portfolio as well, right? We have done all this work that we have done the last three years. I think to take a new look at the plan and talk to you guys about it, I think it's appropriate to do.
Terrific. Appreciate the flexibility. Thank you very much.
Thank you.
Our next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question.
Hi, thank you.
Morning.
Just wanted to start off with a question on the geographic outlook. Maybe Nick, give a bit more color on Q4, if the U.S. is the only region that's down in sales year-on-year, or whether there are other regions as well. On the 2016 geographic outlook, I was intrigued you talked about China growing. Is that just on the assumption that there's a sharp step change sometime early next year? Also in EMEA, you had a down number there at the bottom end of the range, even though EMEA seems to have been a fairly steady performance recently. Any color on that?
Well, this is Inge. I think first of all, if you look upon 2016 and the outlook, you talked about China. Yeah, we have China and Japan actually low to mid-single digit growth. I was recently in China, and I would say there is, of course, growth, right? You have just to prioritize right and execute the plan. I don't think, generally speaking, that you talked about the step change. I don't know if the step change. This is the second-biggest economy in the world. There is growth, generally speaking, specifically at what I would call domestic businesses. By definition, our penetration is low. We should grow there, no doubt about it. Our plan is good, right? Our plan is good, and we have prioritized right there.
I think, if you ask, talk about next year, I think that Latin America and Canada, we talk about 1%-4%. I think in that part of the world, in Latin America specifically, they will do okay, driven by Mexico. I think Brazil still will be a challenge, and I think we have to think about that for maybe one, eventually two more years before Brazil will come back to how we remember Brazil in the past. We have to see what is happening in West Europe. I would say that, you heard here that we talk about the type of, on the low end, of course. There's a lot of geopolitical things that are going on that is putting some, I would say, uncertainty in a way. Again, my view is West Europe is a very sophisticated market.
They are driving a lot of technology advancements there, which is good for 3M. That will not be a stellar growth, but we are there, and we will capitalize on what we can do. Just to your first point relative to the last quarter here, I think as Nick said, we see a slowdown, what I think is more of a global phenomenon in consumer electronics. I think we all have seen some report coming out lately that, if you go the whole way from smartphones to tablets and TVs, there's a small downturn in that, and in my view, temporarily, because we know that's a cyclical business, and it will come back again.
For me, personally, I'm very pleased with the work that we have done in Electronics & Energy business group in order to optimize our portfolio and are able to deliver very robust and good margins, despite that we will see a downturn in volume for one or two quarters, right. I don't know if you recall, but we were running that business at 15.7% at the time, and I think this year, you will be very pleased when you see the end result relative to margins. I'm very pleased with that business in the way we operate. We would like to see more growth all the time, but that's the type of the nature of that business. I hope that helps.
Yes, that does. Just my second question would be on pricing. If you exclude the sort of the FX adjustment impact, how you feel about pricing entering 2016 versus how you felt about pricing power, say, 6 or 12 months ago.
Julian, when we strip out FX, our core pricing, excluding pricing actions we take in reaction to FX movements, that core has been over a period of years in the 30 to 50 basis point range. It's probably been in about at a 30 basis point range for 2015. We think that range is about right for us going forward into 2016. We're not seeing a change on that front, Julian.
Great. Thank you.
Our next question comes from the line of Steven Winoker from Bernstein. Please proceed with your question.
Good morning. This is George
Morning.
Stout on for Steve.
Okay. Morning.
As you put together your 2016 organic growth forecast, how much of the business would you say you have a decent visibility into through distribution or direct sales, rather than looking at IPI or other macro forecasts?
I think it all depends on the different business groups. As you know, if you think about 3M, we have a lot of business that are specced and designed in, and then you have type of the, I would say, consumables, right? I think on the spec and designing, we have a very good view on it. On consumables, maybe sometime you're one or two layers back. I would say that we have pretty good visibility in the different businesses relative to inventory situations, and that's a combination, as you know, of facts, and some art, right, relative to the connection into the different business groups. You take that and I don't think anyone, to be honest, will have a total picture of it, at any company.
I've never met anyone that can tell me in total how it look like. I think it's a combination of you feel the fabric of the business, and then you, of course, look upon the growth rate that is estimated in the marketplace, which is a strong indicator, if you like, relative to how we should plan moving forward. I think it's a combination of science and art, to be honest.
Okay, Nick, trying to piece together your all-in margin assumptions for next year, given the EPS walk and getting close to 60 basis points. Am I in the right ballpark there? Could you provide some more color on that margin assumption?
George, I'll go through that in a little more detail from a margin perspective. 2016 will be another year where we're expecting margin enhancement. At the midpoint of our guidance, that would assume that we're at approximately 150 basis points of margin expansion for 2016. The drivers of that margin expansion year-on-year is our restructuring that we've covered, both the impact to 2015 and to 2016. Pension, the additional productivity, price raw material benefit, and to some extent, volume, depending on where we are in that 1%-3% range for organic growth. That will be partially offset. Our margin headwinds next year will be the strategic investments I talked about, as well as FX, that we see FX reducing our margin in 2016.
Okay, thanks.
Our next question comes from the line of Joe Ritchie of Goldman Sachs. Please proceed with your question.
Thank you. Good morning, everyone.
Good morning, Joe.
I guess my first question is really maybe talking a little bit about the organic growth cadence in next year first half versus second half, giving that we're going to be exiting 4Q with negative organic growth. Just curious how you see organic growth stepping up or down next year.
Yeah. Joe, first of all, I did say earlier we expect the first half to be more challenging for growth than the second half, or that we expect higher organic growth in the second half. If I get even more specific, the first quarter of 2016 will be having our most challenging comp. Organic growth in the first quarter of 2015 was 3.3%, and within that, we had our Electronics & Energy with high growth. The electronics business in the first quarter was up 10%. That's creating a challenging comp for us in the first quarter. We're anticipating that total company organic growth could be slightly negative in the first quarter, with increasing growth as we progress through the year.
Great. That's helpful color, Nick. Maybe kind of switching gears a little bit to the balance sheet. The $2 billion-$4 billion in incremental debt in 2016, I think, puts your gross leverage closer to two times. I guess I'm just wondering with the capital allocation plans that you have moving forward, how much more capacity do you have to maintain your credit rating today?
Yeah. Joe, this has been part of a journey that, we announced 2 years ago about better optimizing our capital structure. We've been making progress on that, as we've added leverage in the last few years to our balance sheet. Just to put your question in context, as we think about that, it's not so much managing to a particular debt rating, but if your question is, if we'd add significant leverage from this point forward and whether we have the capacity or appetite to do that, we would consider that for the right strategic opportunity. By right strategic opportunity, it'd be a large strategic value-enhancing acquisition. That would be the most likely. Nothing like that contemplated now, but we have added leverage. We're clearly adding leverage in 2016.
Beyond that, we'll talk in a little more depth on that in our 2020 plan outlook that we share late in March, Joe.
Okay. Thanks, guys. I'll get back in queue.
Thank you.
Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question.
Morning.
Morning, Shannon.
Hey, can I follow up on the West Europe guidance? You know, it seems like, you know, sort of through the year here, you guys were hoping to and maybe encouraged by some of the things you were seeing in West Europe and now we're sort of guiding to, you know, -1% to +1%. Have you seen things take a step back there or maybe, Inge, talk about some of those, you know, points of caution that you were referencing?
Yeah, you know, if we go back to the beginning of the year. Think about the currency effects, et cetera. I think that all of us at that point in time had a view that specifically export will accelerate out from West Europe. If you recall that type of thesis, that was an external view. It did not really happen, right? I think it was a combination of maybe not the best execution of the European businesses. I'm not talking 3M, I'm talking about the business environment over there, and some other challenges that happened specifically in Germany, I think, right? Which is more a bigger issue, both politically and around some of the companies there that went into some challenging situations.
I will say that the latest things that happened here on November 13 in Paris is, of course, for all of us, maybe tempering down of how will it look like for 2016. For us, again, is to say that we are looking for margin expansion. We are planning for a situation where it will be slow growth, right? I think the best thing to do when you plan is to make sure that you are more conservative in an environment like that than type of living on hope. Hope is not a strategy, right? I think you have to be cautious relative to how 2016 will be, and then hopefully it will be better.
I think it's important for us as we are driving for efficient growth, is to make sure that if your plan is that you now make sure that your structure is as lean as possible, that you take out as much layering management as you can and focus in on execution in the front end in terms of sales and marketing and commercialization. As you know, it's different languages over there. In some cases, it even different currencies. You need to be strong in the front and then be very aggressive relative to your corporate structure, which we are and been for quite some time. I will say for me, around West Europe, the outlook on growth is what it is. We need to do better whatever the growth rate is coming out from the countries.
It will be all about margin expansion and we have the lowest margin in West Europe of any entity in 3M, and that's also why we do a lot over there relative to our supply chain optimization and our service center that we open up in Poland, et cetera. Big focus in West Europe on efficiency and whatever growth will come, we will take it.
Okay, thanks. On the higher R&D and some of these other strategic investments you're making, where are we now in terms of the payoff from those things? What are you seeing? When you first started to take that R&D up, the idea was to increase more in basic research with the idea of trying to get some more breakthrough type products, which obviously would take a little longer. Where are we on that now? What are you seeing kind of come through the system?
First of all, you see that we are coming 5.8% in R&D investment as we speak. If you take that whole initiative, if I just make a summary for you where we started. We have had 30 programs started. We have 19 that we started out in 2013. We have seven in 2014, and we have four in 2015. I will say that of all those, seven have been discontinued, right? Seven of them said, "Hey, this will not work." I feel good about 13, seven out in the process, which is for me an indication of productivity is coming big time to R&D as well. We invested $40 million in 2013. We have totaled up to 2014, we have had $100 million invested and we have seven programs now that have been in early stage of execution.
I would say that I'm pleased with that initiative and as you know, it's about disruptive technologies. We take longer time, but I'm pleased what I'm seeing and strange that it is sometimes you're also pleased to see that we in fact stopped something early, which I said we have stopped or discontinued seven of the programs. I think that you should think about it, that we had sales in this year from those programs around $200 million, and I think it will be double that by 2016, like $400 million. You have a $400 million sales by 2016 on that initiative, which is a long-term initiative, right? For me to get $400 million by 2016 is okay. I'm never happy, as you know, I would say it's okay, but I'm pleased with the evolution on it.
All right, great. Thanks.
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, Deane.
Good morning, Deane.
On the 2016 EPS walk, I was hoping you'd give some additional color on some of the assumptions that went into two of the buckets. The additional productivity, so what kinds of investments are being made there and some specifics? Also under the strategic investments, what is the ERP system in there? Is there anything that's discretionary that you might be able to roll back later in the year?
Deane, I'll cover the additional productivity piece. For that, I put a range of $0-$0.10, and those are on top of everything that we're getting for productivity in 2016 from the restructuring that we're doing in 2015. About half of that is coming from our business transformation, and by business transformation, the efforts we're doing there, where we're working on are changing and standardizing our global business process, implementing ERP to improve our customer service and responsiveness. We're also establishing global service centers. Inge talked about one of those being deployed. That's a big part of that productivity. Some of the CapEx that I've talked about in the past, where we're investing in automation, that's also part of the productivity, the additional productivity, the Lean Six Sigma efforts that we have been putting in and continue to increase our efforts on.
All of that additional productivity, Deane, is net of any kind of inflation we see on wages. This is productivity that more than offsets wage inflation.
To the [tornado piece, you have to look upon that they are investment that will support our ongoing portfolio efforts. I would say to enhance the ability to serve our markets better. We put that aside in order to make sure as we go that we can take action in order to improve productivity and we speak. It could be a smaller factory somewhere that we will consolidate in one way or the other, or just have the flexibility to make those investments as we move ahead, as we strengthen the portfolio, I would say. We have done, as you know, for the last couple of years, we have taken pieces of it here and there, including business transformation, as you talked about. We're coming to a different point now in business transformation.
We say it will now go more to strengthen the portfolio as we move ahead.
Thank you. Just one follow-up. Are you contemplating additional potential divestitures from the portfolio, similar to what's being looked at on Health Information Systems?
Portfolio management is an ongoing process, as you know. I would say that we are constantly evaluating ourselves, pieces of the portfolio, if it will create more value inside or outside of 3M. You also know that we are very dependent on our technologies in order to drive certain businesses. I think that's an important element to think about. I think the interesting thing here, Deane, is to say that when we worked on that category under strategic review that started $2.5 billion, they were businesses that were underperforming versus the average of 3M. All very good businesses that were addressed. Health Information Systems is different, right? That's more a question of can we, in our business model, create additional value for you and for us versus doing it in a different way.
I don't think there's anything else in front of me at this point in time for consideration. I've not seen it's not there.
Thank you.
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.
Morning. Inge, can you just maybe step back a little bit? Obviously, we're in a very unusual economic environment here. I just wonder what gives you confidence that we're not in the early innings of something more negative than you put forth for 2016, and what are you looking at to recalibrate that forecast as things play out here the next several months? Are there a couple indicators, external indicators, or dynamics in your business that you're really looking to for a clue on where this global economy is actually headed?
Well, first of all, we base a lot of our assumptions, of course, on external facts and data that is coming towards us, we often temper that down because we know often we're coming out that is slightly optimistic in the beginning, I think we have facts on that as well, that as the quarters and years are going, it's all tempering down, if it's IPI, industrial production index or GDP. In addition to that is important element is to, in the monthly and quarterly meetings that we have with the division, get the feeling of what is going on in their specific markets. All the trips that I do personally in order to travel around to different parts of the world in order to get the feeling for it.
I will say that I don't, at this point in time, see anything that is indicating for me that it will be much, much slower as we move into 2016. I think what you see here is realistic based on the information that I have at hand at this point in time. I think that the change maybe as we indicated here, is maybe on the Consumer electronic part, where you saw other indication coming out earlier this week or end of last week, where looked like smartphones, tablets, and even TVs in that space. I think also into semiconductor had slowed a little bit. Reality is those businesses go in a cycle, and they will turn around again.
As I said earlier on another question, me, myself, are very pleased with the work we have done in that business now to have a structure in place where we can produce and deliver very good margins, even in a downturn. I would say, I've been around here the last quarter, to most part around the world, generally speaking, you would say that yes, there will be positive growth, and there is growth opportunities. I think it's up to us, with the portfolio work we have done, and I'm talking now portfolio work on a local level in each country to go after those opportunities that are there. There are growth, right? There are growth, when you segment down and you look into specific areas, right? You still see good growth, generally speaking, in Health Care and Consumer around the world, right?
Those domestic markets are growing well, and we capitalize on that, right? Health Care here is one of the highest growth rates going into next year with the highest margin, I would say as well, right? I think it's important that you make those call and prioritize. I'm very confident that the 3M team are doing it because we have done it for so many years that it's sort of ingrained in the DNA here. Coming back to our culture and model of empowering people locally to go after the opportunities that they see there.
I was wondering if you could elaborate just a little bit more on U.S. Industrial. You're certainly not alone highlighting weakness there in Q4. Would you say it's very, very broad-based, or are there some pockets of strength, auto, for example, or anything you could just kind of give us on maybe the key vertical exposures there would be helpful. Thank you.
I think it slowed, and I would more categorize it maybe broad based versus saying there was one specific area that slowed more than the other. I think it was broad based, generally speaking. The Industrial sector in the U.S. have been going very well for quite some time, right? I would say it's just slowing a little bit, so it's not a huge, someone falling off the cliff, right? It's just that it's slowing down a little bit after it's done very well in one of the biggest sector in the U.S. economy. I think it's broad based. That's what we see at least, right? We cannot call out one division or business inside Industrial business group that is falling off more than the other. I think it's broad based.
Thank you.
Thank you.
Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question.
Thanks. Good morning.
Morning, Nigel.
Morning. We've covered a lot of ground, but I do want to just come back to the 4Q. When you gave the update in October, it feels like you were trending in the low single digits. We've covered the consumer electronics, we've covered U.S. Industrial weak. To what extent are you seeing unusual behavior with your customers? You mentioned you weren't seeing inventory adjustments back in October, but are you now starting to see that? Are you starting to be impacted by extended shutdowns over the holiday period?
Nigel, couple things just to put it in context. Fourth quarter last year, we were seeing quite a bit of activity in what we considered building inventory in the channel. We're clearly not seeing that occurring now. I'm not ready to declare that we're seeing necessarily channel inventory contracting more, but it's clearly not building. As far as quarterly trending of what we're seeing so far, Nigel, there's no particular trend we're seeing. It's what we've seen in October and November and what we're estimating for December. It's all a very consistent movement of the low to negative growth that we're seeing in Industrial and in the fourth quarter. As far as year-end behaviors of plant shutdowns, probably hearing just a little bit more of that than I did a year ago, but I can't say it's a substantial change in what I'm hearing.
Okay. That's really helpful. Thanks, Nick. One more thing. You mentioned the tax rates. Just thinking about your 2017 assumptions versus where we are in 2016. One big variance is the tax rate's substantially higher, I think you talked about the impact of FX on the tax rate, but I'm wondering, is there a greater proportion of overseas earnings being repatriated to help fund the capital allocation? Is that a factor in the high tax rate?
That's really not a tax rate. The main thing driving our tax rate is the factor driving our tax rate up is the strength of the U.S. dollar, which is in essence, shifting more of our greater portion of our total earnings into the U.S., which is our highest tax jurisdiction. That's offsetting much of the good progress we're making with our centers of excellence. In terms of a longer-term view, Nigel, we, in the past, have talked about a 27% tax rate as a target by 2017. With the stronger U.S. dollar, we see that still occurring, but likely a couple of years later than what we had previously targeted.
Nigel, it's Matt.
Hi, Matt.
One follow-up on that, Nigel. You'll see, well, you did see, and you will see that our international cash balances are lower than they have run. It's not because we're choosing to repatriate and pay the tax cost. It's really because we've been able to deploy more of that cash toward acquisitions in a year where we've invested more in acquisitions.
Right. Okay. Thanks, Matt. Thanks.
Okay.
Our next question comes from the line of Steve Tusa of JPMorgan. Please proceed with your question.
Hey, guys. Good morning. Thanks for fitting me in here.
Yeah.
Morning. How are you?
Just to make sure we know from a rounding perspective, what exactly do you think fourth quarter organic will be? Something in the range of 2%-3%, I think? Then also, just how did the monthlies play out here? Just curious as to the progression going through the quarter.
Steve, we're just doing the math. It's approximately a 2% negative organic growth in the fourth quarter for us to land at the 1% organic growth for the total year. When we adjust for billing day anomalies between the months, that's very consistent amongst all three months of the quarter.
Okay. I'm just curious as to, you're kind of basing the, if your toughest comp in the first quarter, should we just look at how the comps progress, then that's how the growth builds throughout the year? Are you assuming second quarter is still relatively tough and close to flat?
For 2016, the biggest driver in looking at how to quarterize this is looking at the comps that we're going against in 2015. That would be the best guide.
Okay
It will follow fairly normal trends.
That makes a lot of sense. Just one last question. Last year, I think productivity versus strategic investments was positive. This year, it's going to be negative. I know that there are some other things that go into that. You obviously have more restructuring to offset. Am I looking at that the right way, that you look at these things in a holistic sense, including all the variables? Is there something now about kind of productivity offsetting strategic investments, whether it's just to get more growth or it's a more competitive world? How should we think about that trade-off going forward?
Steve, I think the best way for you to think about it is, I call that additional productivity. Clearly, the restructuring is a large driver of productivity that we're having to deliver in 2016 as we deliver this plan. This was additional above and beyond what we had baked in through the restructuring. If I were you, I'd be looking at those two in combination and trying to discern any kind of productivity trends over the years.
Okay. Then, sorry, one last quick one. You said 30 basis points of core price this year. You're basically saying there's no impact from the foreign exchange on the total price number?
Yeah, 30 is our core. That excludes all of FX. FX total revenue impact, we're fairly muted in the expectation right now of a negative one to negative three. There could be a little, but I think we're only talking 10 or 20 basis points on top of that, if currencies stay where they are today.
Okay, great. Thanks a lot.
Thank you.
Our next question comes from the line of Robert McCarthy of Stifel. Please proceed with your question.
Good morning, everyone.
Morning.
How do we think about your kind of planning for oil prices generally, how you're thinking that it's going to play out with the puts and takes in the portfolio for 2016?
Our $0.10-$0.15 of raw material benefits that we're estimating is based on an assumption that oil prices will be in the $45-$55 range on average through 2016. I'm clearly not going to try to predict what it's going to be, that's what that assumption's based on. If it comes in lower than that can create a little bit more of a tailwind for us. If it's higher than that, it could start to put us to the lower end of that range. The other point I'd add to this is that $0.10-$0.15, we clearly see the vast majority of that benefit coming in the first half of 2016, very little of that coming in the second half of 2016.
Given some of the currency moves you've seen worldwide and kind of your positioning in terms of your global production footprint, is there any areas of the world where you have to be particularly focused on share vigilance in terms of market share, in terms of pricing? I mean, how do you think about that going into 2016?
Yeah, I would call it unchanged. We've been diligent and vigilant on that throughout 2015, of how do these currency movements affect our competitiveness around the world? In particular, the movement in the euro against the US dollar and what that does with European competition that's locally sourced in Europe. Part of our action to that is also adjusting our sources supply as needed as we've moved more of our sources supply into Europe, we continue to expect more progress on that in 2016.
If this is a worse downturn than perhaps you're modeling right now or thinking about right now, should we look at the antecedents of 2008 with the furloughs, or what kind of actions is in the playbook to think about how you'd operate in a tougher cyclical rollover environment?
If you, [Liv], as you refer to the playbook, you can see there that you have operational excellence is the last strategy of the six, and you have the people side, it is the fifth of the six. If you think about that, business environment as we know, things are changing, and you have just to make sure that you are ready to take action if you need to, right? I will say that, I've been in 3M for many years, as you know, and we have always a contingency plan ready to go if needed. I think that's one of the beauties that I've learned working in this company is to make sure that you always are ready to take action if you need to.
If you refer to the playbook, what's in the playbook, we are using the same playbook as we did 2008, if we need to. I don't hope we need to, but we did the same at that point in time. One thing that we did was to make sure that we didn't jeopardize investment for the future, meaning research and development and the people that stay with us. Those are the two things when you think about a downturn that you should be very careful to touch. Your investment for the future, specifically in research and development. Make sure that the individuals that are with you get all the development they need, because that will be the future when the economy's turning around again.
Thanks for your time.
Thank you.
Our next question comes from the line of Scott Davis of Barclays. Please proceed with your question.
Hi. Good morning, guys.
Morning, Scott.
I think a lot of ground has been covered already. There's a couple specific things I wanted to talk about. You have in your 2016 guide, a $0.25 to $0.30 benefit from restructuring. That assumes, I guess, that you're not going to be doing restructuring at a comparable rate to 2015. I guess, piling on maybe Rob's question and even Jeff's before that, what type of a downside scenario do you need to see where you need to take another step of restructuring? Is it flat growth or is it something more like negative?
I think it would be more of a negative, if you're coming to that scenario, right? I think that our structure, based on what we did in 2015 specifically, what we have done over the last four or five years, the structure is in a much better shape today versus when we went into a real downsize in 2008, right? I think the other thing, if you look up on that chart where we have gone from six sectors to five groups, we've gone from over 40 divisions or 40 division to 26, that's taking out structure and driving efficiency and productivity. I would say that it need to be something negative in order for us to feel the need to take another big swing as we go. Again, we would take the action that is needed if it's coming, right?
Yeah. Fair enough. Okay, just a little bit of a nit, normally don't call out stuff like this, but on slide 22, it says developing markets +2% to +6%. On slide 23, you have the range of EM, and it's more in the range of 1% to 4% and, in EMEA, -1% to +2%. When you think, I see a range of +2% to +6% is, it seems, let's say midpoint of +4%. That seems like a fairly aggressive forecast for EM, just based on what we're seeing right now.
Is there something within this forecast, first of all, kind of explain the differences between what's on slide 22 and 23, also where is the underlying confidence, I guess, come from that EM isn't on that slippery slope to having another really tough year in front of us? It's hard to imagine, short of massive amounts of stimulus in China, things get incrementally that much better, and Brazil seems to be falling off the face of the earth. What is the playbook, I guess, where things could get better fast enough for that 4% to become a reality, particularly based on what you'll probably show us in 4Q?
Well, I think, first of all, that there's a couple of places where there eventually will be upside. I think China could be for sure, and China must be in order for you to get growth. If you have decided to be a global growth company, you must grow in China. You have China part of it. You have also India part of it. India is a portion where I believe that we can see a positive uptick 2016, to be honest. You can also see in some of the countries in Central East Europe that will eventually do better. The three bigs there is, of course, Russia, Poland, and Turkey. I think based on their performance, maybe the last 24 months, I think we are closer to see a positive growth curve eventually coming there. You have Southeast Asia.
We should not underestimate Southeast Asia. That is, in our plan, an important growth driver for us. As you know, Southeast Asia, you can look upon as both, you have the domestic market there, but you should also view them as almost a supplier both to Japan and to China. I would say that if you take the bigger pockets of real growth that eventually will capitalize and materialize, you need China, you need Southeast Asia, and India is also a more positive outlook than I think we appreciate at this point in time. I totally agree with you on Brazil. That would take us another two years. Brazil will not help from that perspective. Does that make any sense for you?
Yeah, it totally does. I guess I'm thinking about it in terms of context of, you've probably been working on this outlook for the last couple of months and just the rate of change in the last week.
Yeah.
Just look at commodity prices overall, the data we're getting even out of India is weakening by the day also. I'm just trying to figure out if this is an aspirational guide as far as emerging markets, or if you actually really do see-
Yeah
something on the ground that maybe we don't see in the government data that would lead you to believe that we would not be For example, if you're going to do 4% in emerging markets next year, it would be tough to have the first half of the year be negative, right?
Regardless of comps, it would make it pretty tough.
Yeah.
I guess I'm trying to delineate between the two of what we see.
Yeah
In data, which I'm sure you see as well.
versus what your local salespeople and local guys are saying.
You have some businesses like Health Care that could be growing no matter what.
Sure. Yeah. No, I will say that I keep it to what I said relative to geographical growth drivers. Hak Cheol Shin that is leading our international business give us very good confidence relative to what is there and bubbling up, right? He just came back Thursday, I think, from being a trip down to Middle East, right? Including Saudi Arabia. There is pockets of growth there that is very impressive, to be honest, right?
Okay.
In Middle East, right? You have to take all those pieces together reality will be that the turn need to come in the big places, right? Need to come in China, need to come in India, need to come in Southeast Asia. That's what I'm saying. Don't underestimate Southeast Asia.
Well, good luck, guys. I think you're controlling what you can control. Good luck and we'll see you in March.
Yep. Thank you.
Thank you. That concludes the question and answer portion of our conference call. I will now turn the call back over to 3M for some closing comments.
Well, thank you. To wrap up, 3M is positioned for a successful 2016. As you have heard, we expect to deliver strong earnings growth while continuing to invest in the business. This includes investments in organic growth and productivity, which will enable us to generate efficient growth next year and for years to come. We look forward to seeing you in March, and when we will show you our new research laboratory and share more details about our long-term plans. Thank you for joining us, and 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.