Earnings Call: Q3 2015

Oct 22, 2015

Ladies and gentlemen, thank you for standing by. Welcome to the 3M third quarter earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have a question, please press 1 followed by 4 on your telephone keypad. It is recommended that you use a landline phone if you are going to register for a question. As a reminder, this conference is being recorded Thursday, October 22nd, 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. Welcome to our third quarter 2015 business review. On the call today are Inge Thulin, 3M's Chairman, President, and CEO, and Nick Gangestad, our Chief Financial Officer. Each will make some formal comments today, and then we will take your questions. Today's earnings release and slide presentation are posted on our investor relations website at 3m.com. Please turn to slide two for a list of upcoming 3M investor events. On Tuesday, December 15th, we will discuss our 2016 business outlook on a conference call beginning at 8:00 A.M. Central Time. Please note we will not be hosting this year's outlook meeting in New York, as has been our practice in recent years. The conference call should last approximately 90 minutes, please plan accordingly. On March 29th of next year, we will be hosting an investor day at our headquarters in St. Paul. Lastly, note the dates for next year's earnings calls, which are 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. Please turn to slide four. I will hand it off to Inge. Thank you, Matt. Good morning, everyone. As always, thank you for joining us. 3M delivered a solid operational performance in the third quarter. In an external environment that will remain soft, our team posted strong earnings, organic growth in all geographic areas, and expanded margins. Equally important, we continue to make investments and take actions to build strengths on strengths and position 3M for long-term success. Let me first take you through the quarterly numbers. Earnings per share rose to $2.05, which is a 3.5% increase year-over-year. Company-wide, we deliver organic local currency sales growth of 1% with positive growth across all geographic areas. Four of our five business groups grew organically, paced by Consumer at 5% and Healthcare at 4%. Acquisitions added one percentage to sales in the quarter as we deployed capital to drive growth and strengthen the business. The strong US dollar continued to impact our top line, reducing quarterly sales by more than 7%. Total sales in the quarter declined 5% to $7.7 billion. At the same time, we continued to generate strong productivity in the quarter by controlling those things within our control. As a result, operating margins were 24.3%, up nearly a full percentage point year-over-year. All five business groups deliver margins greater than 22%. In the quarter, 3M also returned $2.2 billion to shareholders through dividends and share repurchases. Please turn to slide number five. At 3M, we always have one eye on the microscope and one eye on the telescope. The microscope view is about driving growth, productivity, and efficiency day-to-day, quarter-to-quarter, and year-to-year. The telescope view is about the long term and making sure we are investing in the future. The global economy continues to evolve, as do the needs for us and for our customers. 3M is evolving as well, building for a future that will be more competitive, more dynamic, and more challenging. We're doing that in large part through our three strategic levers: portfolio management, investing in innovation, and business transformation. Let me start by describing our efforts to strengthen and focus our portfolio and ongoing process we began in 2012. In the third quarter, we closed two important acquisitions to both complement organic growth and enhance two of 3M's core platforms, personal safety and filtration. The integration of those businesses is off to a good start. At the same time, earlier this month, we announced the divestitures of our library system business and our French license plate converting business, both within our Safety and Graphics Business Group. After extensive review, we concluded that these businesses was worth more to an outside owner versus remaining part of the 3M portfolio. Selling the businesses resulted in greatest value creating for the company and for the shareholders. Last month, we also announced that we are exploring strategic alternatives for 3M Health Information Systems business, which is an industry leader in healthcare coding software. Options includes spinning off, selling, or keeping the business. Ultimately, we will choose the best path to benefit 3M, our stakeholders, and the business itself. The selection of a strategic direction is anticipated by the end of Q1 in 2016. In addition to portfolio investments in the quarter, we continue to invest in organic growth through research and development in close partnership with our customers and the market. Technology conversion will remain a key driver for the global economy into the future, our investments will strengthen 3M's scientific edge. At our Investor Day in St. Paul next March, we look forward to taking you through our new state-of-the-art research laboratory. To make 3M more competitive, more productive, and more efficient, we are transforming our business processes. The backbone is a new global ERP system. As you recall, we are implementing this system on a regional basis starting in Europe. 3M made good progress in the third quarter, including a successful deployment across the Nordic countries. Our team is focused on continuing to execute a roll-out plan in West Europe, with the U.S. to follow. By 2020, our business transformation efforts will result in an estimated operational savings of $5 million-$700 million annually and a reduction in working capital of half a billion. Beyond our three strategic levers, we are taking other steps to increase our competitiveness and strengthen 3M for the future. Today, we announced a restructuring plan that will result in the reduction of 1,500 positions. Reduction will be preliminarily focused on structural overhead, largely in the U.S., along with slower-growing markets, with particular emphasis on Europe, Middle East, Africa, and Latin America. On a pre-tax basis, we will take a charge of approximately $100 million in the fourth quarter related to this plan, with savings of approximately $130 million in 2016. Each and every day, as I look across our enterprise, I grow more confident in our future. We are taking action to build a stronger, more agile, and more focused company that will compete and win, not just today, but well into the future. Thank you. Now Nick will go through more details on the quarter. Nick? Thank you, Inge. Good morning, everyone. Please turn to slide six, where I will cover the elements of third quarter sales growth. Q3 organic growth was 1.2%, largely driven by higher selling prices. Volumes were up slightly in the quarter. All geographic areas posted positive organic growth in the quarter. In August, we completed the acquisitions of Capital Safety and Polypore's Separations Media business. The net impact from acquisitions and divestitures added one percentage point to sales growth in Q3. Foreign exchange impacts reduced sales by 7.4 percentage points, with notable year-on-year declines in the euro, yen, and Brazilian real. These currencies devalued versus the U.S. dollar by 15%, 14%, and 37% respectively. In dollar terms, worldwide sales declined 5.2% versus the third quarter of 2014. The U.S. delivered organic growth of 1.5%, led by Consumer Health Care, Health Care, and Safety and Graphics. Our U.S. industrial business, which experienced softer end market conditions and a challenging year-on-year comparison, declined organically. Asia Pacific organic sales increased 0.4% in the quarter, where four of our five business groups posted positive growth. Organic growth was led by Health Care and Safety and Graphics, while Electronics and energy declined year-on-year. Within Asia Pacific, Japan increased 1% organically or 5% excluding Electronics. As you may recall, last fall, we acquired the remaining 25% interest in our Sumitomo 3M subsidiary. The 3M Japan team continues to execute well and is delivering strong results in 2015. China/Hong Kong's organic growth was down 2% or up 3% excluding Electronics. Moving to EMEA, we saw organic growth of 1.5% with West Europe flat, Central East Europe up double digits, and Middle East Africa down slightly. Finally, Latin America/Canada delivered organic growth of 2.3% versus last year's third quarter. Mexico continued its trend of strong double-digit organic growth increasing 13%, while Brazil declined 2%. Please turn to Slide seven for the third quarter P&L highlights. Company-wide, third quarter sales were $7.7 billion, with operating income of $1.9 billion. Operating margins were 24.3%, an increase of 90 basis points year-on-year. As you see on the right-hand side of the slide, the combination of lower raw material costs and higher selling prices contributed 170 basis points of margin expansion. Productivity added another 20 basis points to margins as we continue to prioritize investments, benefit from past portfolio actions, and drive operational efficiencies through Lean Six Sigma. Foreign currency impacts, net of hedge gains, increased margins by 20 basis points. The impact from recent acquisitions reduced Q3 operating margins by 60 basis points as we began to absorb purchase accounting adjustments and work through integration plans for Capital Safety and Polypore's Separations Media business. Strategic investments reduced margins by 10 basis points. Finally, higher pension and OPEB expense reduced third quarter operating margins by 50 basis points. Through nine months, we have increased total company operating margins by one percentage point to 23.7%. Let's now turn to Slide 8 for a closer look at earnings per share. Third quarter earnings were $2.05 per share, an increase of 3.5% year-on-year. The combination of organic growth and margin expansion contributed $0.11 to our earnings growth this quarter. This result includes a negative $0.04 impact from higher year-on-year pension and OPEB expense. Our third quarter tax rate was 29.6% versus 30.3% in last year's comparable quarter, which increased earnings by $0.02 per share. Average diluted shares outstanding declined by 4% year-over-year, which added $0.08 to third quarter earnings per share. The acquisitions of Polypore's Separations Media business and Capital Safety reduced earnings by $0.04 per share in the quarter due to purchase accounting adjustments and one-time expenses and integration costs. In the fourth quarter, we expect $0.02 per share of additional dilution from these transactions. Foreign currency impacts net of hedging reduced pre-tax earnings by approximately $95 million, or the equivalent of $0.10 per share. For the full year, we expect foreign currency impacts to reduce earnings by approximately $0.40 per share. Let's now review cash flow performance on Slide 9. We generated $1.7 billion of operating cash flow in the quarter, down slightly from last year. Third quarter capital expenditures were $354 million, in line year-on-year. For the full year, capital expenditures are expected to be in the range of $1.4 billion-$1.5 billion, versus a prior expectation of $1.4 billion-$1.6 billion. We generated $1.3 billion of free cash flow and converted 101% of net income to cash. Free cash flow conversion for 2015 is now expected to be in the range of 95%-100%, versus 90%-100% previously. As a reminder, our fourth quarter free cash flow conversion is typically the strongest of the year. We returned $2.2 billion of cash to shareholders in the third quarter, an increase of $369 million year-on-year. Cash dividends were $635 million, and gross share repurchases were $1.5 billion. For the full year, gross repurchases are now forecasted to be in the range of $5 billion-$5.5 billion, versus a prior expectation of $4 billion-$5 billion. Now let's review our business group performance starting on Slide 10. Industrial posted sales of $2.6 billion in the quarter, up slightly organically. Our automotive OEM business grew mid-single digits as we continue to gain share by increasing 3M's content per vehicle. This business consistently grows faster than the rate of global car and light truck production levels. 3M Purification, Abrasives, and Industrial Adhesives and Tapes also posted positive organic growth in the quarter. Our Advanced Materials business declined, primarily due to weakness in the oil and gas market. The acquisition of Polypore's Separations Media business added 70 basis points to Industrial sales growth in the third quarter. On a geographic basis, Industrial's growth was positive in Latin America, Canada, Asia Pacific, and EMEA, while declining in the U.S. The Industrial business delivered operating income of $580 million in the quarter. Operating margins were 22.5%, up 30 basis points year-over-year, or up 90 basis points excluding the Polypore Separations Media acquisition. Let's now turn to Safety and Graphics on slide 11. Sales in Safety and Graphics increased 2.9% organically to $1.4 billion. Organic sales growth was strong across much of the portfolio, including Commercial Solutions and our Heartland personal safety business. The Roofing Granules business posted double-digit organic growth in Q3, while Traffic Safety and Security Division declined year-on-year. Complementing Safety and Graphics organic growth was the acquisition of Capital Safety, which added 4.2% to sales in the third quarter. On a geographic basis, organic growth was led by Asia Pacific, EMEA, and the U.S., while Latin America, Canada declined. Operating income was $324 million, and operating margins declined 0.6 percentage points to 22.9%. Excluding the Capital Safety acquisition, margins rose 1.3 percentage points to 24.8%. Please turn to slide 12. The Healthcare business generated third-quarter sales of $1.3 billion, with organic growth of 3.7%. Our medical consumables businesses, namely Infection Prevention and Critical and Chronic Care, along with our Oral Care business, were up mid-single digits year-on-year. Together, these businesses represent three-quarters of our Healthcare business. Health Information Systems and Food Safety enjoyed double-digit growth in Q3. Drug Delivery declined organically as its challenging year-on-year comparisons continued into the third quarter. The Ivera Medical acquisition added 90 basis points to quarterly growth. Integration of this business is going well, and it is exceeding sales and profit objectives. Our Healthcare business grew organically in all geographic areas led by Latin America, Canada, Asia Pacific, and the U.S. The business continues to drive penetration in developing markets with 10% organic growth in the quarter. Countries with notable strength included Taiwan, China, Hong Kong, India, and Mexico, all up double digits. Healthcare's operating income was $432 million, with margins of 32.1%, up 110 basis points year-over-year. Next, let's cover the third quarter performance of Electronics and Energy. Please turn to slide 13. Sales for this business were $1.4 billion in the quarter, down 2.8% organically, while operating income increased slightly to $342 million. Portfolio management actions, raw material benefits, and the team's relentless focus on operational excellence drove a 240 basis point improvement in operating margins to 24.9%. Organic sales declined 3% on the electronics side of the business, with Electronics Material Solutions up slightly and Display Materials and Systems declining. In our energy-related businesses, organic sales were down 2%, similar to past quarters, with growth in telecom more than offset by declines in electrical markets and renewable energy. On a geographic basis, organic growth increased in EMEA, while the U.S., Latin America, Canada, and Asia Pacific all declined. Please turn to slide 14. Third quarter sales in Consumer were $1.2 billion, with organic growth of 5%. Organic growth was led by our Stationery and Office Supplies business, with strong back-to-school sales in Scotch home and office tapes, Post-it, and Command products. In the Home Improvement business, our Filtrete brand filters, which significantly improve air quality in the home, also helped propel growth in the quarter. Our Home Care business also delivered positive organic growth, while Consumer Health Care declined slightly. Looking at the Consumer business geographically, organic growth was led by the U.S., Asia Pacific, and EMEA, while Latin America, Canada declined. Operating income increased to $293 million, and margins were 25.2%, up 2 percentage points year-over-year. That wraps up our review of the third quarter business results. Please turn to slide 15, where Inge will provide an update on our 2015 planning estimates. Inge? Thank you, Nick. As we all know, the current economic growth environment remains challenging. Against that backdrop, today we are updating our full-year outlook for 2015. We now expect organic growth of 1.5%-2%, versus prior guidance of 2.5%-4%. Foreign currency translation will reduce sales by approximately 7%, compared with a prior range of 6%-7%. Excluding the impact of restructuring, we expect full-year earnings per share in the range of $7.73-$7.78. We previously expected EPS in the range of $7.73-$7.93. On a GAAP basis, we expect EPS in the range of $7.60-$7.65, which reflects the expected $0.13 restructuring charge in Q4. We also now anticipate the free cash flow conversion rate of 95%-100%, up from the prior range of 90%-100%. Thank you for your attention, and we will now take your questions. Ladies and gentlemen, if you would like to register a question using a landline phone, please press the one followed by the four on your telephone keypad. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three. If you're using a speakerphone, please 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 Scott Davis at Barclays. Please proceed with your question. Hi. Good morning, Inge and Nick. Good morning, Scott. Good morning. I think a lot of us are trying to figure out what, more macro, I guess, than 3M specific, but this is the second quarter in a row where you've taken down your top-line core guidance and trying to get a sense of how much of the decline you guys think might be related to inventory destock versus actual sell-through, and maybe just a state of where you think inventories are right now. Because clearly folks are a little bit more cautious, you could see, be logical that folks be decreasing inventories right now, I suppose, right? Mm-hmm. I think it's a combination, Scott. I think, first of all, when you look upon the decline in terms of IPI growth, we have all seen that going down quarter by quarter during the year, and that is related both to United States and to China and Germany. You can say basically on a global base. I think that has one impact. Of course, enterprises around the world look upon the balance sheet and the cash flow and type of work down the inventory as well. I would say when we look upon our performance in terms of growth, yes, it slowed during the year, but we don't believe, and we know that we are not losing out in terms of penetration or market share. I think it's a combination of both of them. We clearly see we're ending out the year, I would say, at the lower global growth rate in the economy versus what all of us anticipated as we went into the year. When I look upon that, I feel personally very good of how we as a team, and I'm talking now about all the 90,000 at 3M, have been able to manage that through and improve most other metrics when it became more of a challenge for us to grow. We are growing, right? We are growing, and we have margins expansion and very good cash flow. To answer your question, I think it's a combination of both. I think people would like to look out a couple of years now, what will this mean? I think everything you see that we have been doing this year in terms of our portfolio work and our investment in R&D and the business transformation, in addition to the announcement today of a restructuring, is for us to be prepared as we move ahead in order for us to give good return despite maybe something that would be difficult for us to control, which is the growth in IPI and GDP. I hope that helps. No, it does. Help us understand, how do you plan for this type of an emerging market slowdown that we've seen? Really the last time we had a major EM dislocation was in the 1990s, so it was a long time ago, and it's impossible to hedge the local currencies. It's tough to raise prices when you're trying to raise prices in an economy in a recession. At the same time, some of these countries, like Brazil, are kind of hard to restructure, and it's not easy to fire people there either. How do you plan for it? How do you change? Do you just keep moving forward like you always have, or do you start to think in terms of taking real fixed assets out and disinvesting in some of these areas? Yeah. No, you just not continue as you have done in the past, of course, right? The landscape changed, you have to, as I always say, if you go out in the forest and you go out with your map, and the map and the forest doesn't connect any longer, the forest is also always right. You cannot continue with your map if you think about that as a business plan. We are doing that. When I look back over the years here, it's not something that we react to just today based on a quarter that is soft or in one way or the other. If you go back to China, for instance, we have not added people there for 12-18 months. We didn't reduce by definition, but we adjusted and slowed down the way we added people. You are correct, Brazil today will still, in my view, and I think in most of our views, be a challenge maybe for the next two years. You can see also in the restructuring announcement today, we're talking about Latin America as a primary focus, and inside of that is, of course, Brazil. What you have to do is to surgically go in and address it. I think that's serving us well with a model we have that is very much around localization, meaning we have a managing director in each country that is leading the operation, and there's an empowerment around that. They get a lot of help from us, I can tell you that, Scott, in order to make sure that we take action. You're just careful in terms of building out assets, in terms of manufacturing and so forth, that you maybe did differently five, six years ago, and just see how you can serve those markets differently. You heard as Nick said, if you take our Health Care business that is growing very well and is very profitable, they had 10% organic local currency growth in developing economies in the quarter. Consumer was doing well, et cetera. Yeah. When I look upon it, there is a shift in between developed and developing, and we adjust accordingly. There is still big penetration opportunities in those countries. You're more cautious. You are looking upon it slightly different and make sure you position yourself for the long term. Completely understandable. Thank you, guys. I'll pass it on. Appreciate it. Good luck. Thank you, Scott. Hope you're doing well. Our next question comes from the line of Andrew Obin of Bank of America Merrill Lynch. Please proceed with your question. Good morning. Morning, Andrew. Hey, Andrew. Just instead of asking question on margins, I just want to zero in on electronics and energy. If we go back to 2013, the margins bottomed out at 15%, and you reported a margin almost 25%. Could you just focus on that business and explain to us what is it you were able to do there, and how does it sort of translate into changes that are taking place at 3M at large? Yeah. Well, Andrew, good morning. Yeah, you're right. I think it started out like 15.7 or something, right? Now it's incredible improvement relative to margins. What have happened is, first of all, we realigned the businesses, as you maybe recall. We did that in late 2012. One of the reasons for that was we reduced the number of business groups, right? We tried to build out relevance for our customers. We reduced the number of divisions, meaning tried to get out more efficiency, more productivity, and get more alignment with the market and the customer. We were able to respond faster with technology platforms. If you take this specific business, electronic and energy, we went from eight or nine divisions to four divisions. We relentlessly looked upon the structure of it, and we reallocate assets in a better way that we had for that specific business that they have to utilize, maybe in between three different business groups. Now we add it together so they could manage it, which helped them to drive efficiency in the manufacturing, be able to respond much faster to customer demands. Also they address a lot of, I would say, issues in the portfolio, right? You remember we had this analysis where we had Heartland Division strategic or push forward, and then under strategic review. They addressed all of that. As I've said earlier, and I think this is now showing again, I said the last two quarters that the margins for that business is now at the point that it's not dependent on big growth on top line only to drive margins. We have now proven that for the third quarter that the model is now streamlined, efficient, with very good combination of manufacturing, commercialization, and R&D capabilities in a very streamlined organization. I would say, you referred to rest of 3M, it's the same everywhere, but this business group could get a bigger lift because where they started. One business that you see have a very good result this quarter is consumer. Consumer 2012 also started with eight divisions and now four divisions. We worked to streamline the organization. We took out unnecessary layers in the organization. We have addressed span of control and levels in the organization. That is happening everywhere in 3M. You see bigger benefit from some, short-term because they had a lower starting point. EEBG had the lowest, right? If you're running 15.7% operating margin and are part of 3M, that is not us. I will compliment that business group for taking that on and work it through, and today we see the result. It's nice to see. A follow-up question on China. Do you think you will see any benefit from RMB devaluation offsetting just weaker macro there? As it's an export business, as I understand. Andrew, we're watching for that, and the movement in the renminbi has been fairly modest, and we're not seeing a movement on that. If it is, we expect it to be minor, although we do see it as a positive development for that portion of the business, but minor at this point. Thank you. Thank you, Andrew. Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question. Oh, Thanks. Good morning. Morning, Nigel. Just wanted to pick up on the inventory question. You called out your inventory headwinds in 2Q. Clearly, it's impacting 3Q as well. Do you have any sense on how deep we are into this correction, and when we might get into a situation where sell-through is somewhat equal to sell-in? It depends on which business group, or which market you are in, right? I would say that my own observation, when I look upon it for the last three to five years, generally speaking, there's a much better correlation in between sell-in and sell-out for most companies in most markets. I would say, if you think about retail and consumer, much, much better. You can see a slight change from an ending of a quarter to a new quarter based on maybe the season and so forth. I would say it's, generally speaking, very well balanced today, which is also then giving us an opportunity to be more efficient, in fact, right, relative to our manufacturing and production and so forth. To give a timing on it is difficult. I cannot do that, Nigel, to be honest with you. It's very difficult to do. I think overall, management of inventory is handled much, much more effectively, generally speaking, which is good for all of us. Okay. No, that's very fair. Just homing in on 4Q, it looks like you're forecasting your 1% midpoint core growth for 4Q, very similar to what you did in 3Q. I'm just wondering, though, given the developments through the quarter, in particular the little step down in the EM currencies, have you seen any change in behavior in places like Brazil or Southeast Asia, maybe even Canada or Australia, on the back of these movements? Maybe in particular, just homing on pricing power, because you successfully continue to pass through a lot of currency weakness in price. I'm wondering, has there been any change in behavior over the past few months? Yeah, Nigel, in the last few months, what we've seen in FX movements more recently has been more focused on developing market currencies, whereas early in the year, it was more in developed market currencies. Right. How you're seeing that manifest is developing market currencies is where 3M has a little more pricing power, ability to raise price to offset that FX movement. That's why we're seeing the 110 basis points of price growth in the third quarter. About 75% of that 110 basis points we attribute to FX movements. We've seen some shift, though very subtle in that as the year has gone on. No change in your ability to pass on that weakness in price. Yeah, that part, parsing it out between developed and developing has remained remarkably stable. Okay. Thanks a lot. Our next question comes from the line of Steven Winoker of Bernstein. Please proceed with your question. Thanks, and good morning, guys. Morning, Steven. Hey, I just want to follow up Nigel's question quickly on the pricing point. You mentioned, Nick, that 75% was FX related. As you look at unit volumes versus non-currency related pricing going into the fourth quarter, are you therefore implying a pickup on unit volumes at this point? Our range for the year of 1.5%-2% does not anticipate a very significant movement in price growth in the fourth quarter from where we've been running in the first nine months of the year. I think we're expecting it to be very close to where we have been running so far this year. Okay, including unit volumes. Unit volumes will, depending on the implied range for fourth quarter that a 1.5%-2% says for the year, unit volumes could range to slightly negative to slightly positive in the fourth quarter. Okay, great. On the restructuring and ERP pacing, one of my questions here is you've called out that the savings from ERP over time, I think you mentioned again in this call, $500 million-$700 million annually, was it? The restructuring, you've got another $130 million in 2016. First of all, is that incremental to the ERP, the trending for the ERP pacing? I assume there's an enablement. Are they completely separate, or is one enabled by the other, and is there any financial overlap between the two? There is some overlap between the two. The progress we're making with business transformation and the actions we're taking have enabled some of the restructuring actions that we announced this morning. We still see ourselves on that path from the $500 million-$700 million. This restructuring announcement enables us to accelerate the path to that $500 million-$700 million a little faster. That's a portion of that $130 million of savings. It's by no means the dominant portion of that savings we're talking about. Okay. Given the short payback period there, it just makes me think that there's still a lot of opportunity within 3M for additional restructuring. Is that an unfair comment? I don't know if it's an unfair comment. We are living in a competitive world. We adjust as we go. When you look upon this, we are addressing here areas where we believe we will get very good return on the investment we are doing here in Q4. It's very targeted. It's very targeted relative to where those opportunities lay. If you think about what we have done here over the last three and a half years, we have addressed many things in terms of combining divisions and reduced the number of business groups, et cetera. Now, the efficiency is now at the point where we can take the next wing of it. I would say that when you look upon an organization like ours, we have to make sure that we really have the commercialization capabilities in place, that we have continued focus on research and development. Also, I would say around Lean Six Sigma, making sure in times like this that we maybe even add more to Lean Six Sigma. What you have to ask yourself is structure, management layers and so forth, which is necessary sometimes. You come into other times where you just prepare yourself for the future. The answer to your question is, it's very difficult to say if you need to do something more. You play it by year and see how the competitive landscape look like. You adjust to that. Our commitment is to grow our business and have a good return back to our shareholders. Thanks for the color. 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, Deane. Hey, Deane. Hey, I'd like to come back to a question I had asked when you first made the Polypore announcement, we tabled the question till it closed. I'd be interested in hearing the ways you're envisioning leveraging this ultrafiltration technology across 3M, it reminds me a bit of Ceradyne and the way all the different product areas that would benefit from ceramic technology. How do you expect to leverage Polypore? I know it's in industrial, but I would imagine there are some interesting applications on the healthcare side. Yeah. You are correct. It's housed now, if you like, in the Industrial Business Group with very close linkage to our Purification Business, because that we maybe from a commercialization perspective, see the fastest opportunity for us to leverage both of those businesses. When you look upon the technology, where it can move out, I would say it's maybe in life sciences, if you like, even if we don't call it life sciences, but it's a combination of health care and biotech where there is big opportunities for us. We do business in the biotech area, not necessarily with our Health Care Business Group, but very much with the Purification Business. There is big opportunities for us that we can build out. At this point in time, the total focus is short term to integrate the business, make sure we get full leverage based on what we are paid, and can give back to the shareholders based on what we paid for that business. You're right. I think you have more opportunities in businesses going versus Health Care, life sciences, biotech, than you have, for instance, in Consumer and Safety and Graphics. We take it seriously now in terms of integrating the business and execute the plan as a first step. We don't migrate the resources and R&D. They need to present very specific programs and opportunities in order to get the resources to expand the business as we move ahead. More to come, Deane. We are now focused to integrate the model and execute. Second question, I was hoping you could share with us some of the decision-making and the timing on the move of Health Care IT into strategic review. What prompted it? What changed? We have the vernacular correctly within how you frame your businesses. I would assume this had been in Heartland, not pushed forward, what bumped it into strategic review and when? Well, first of all, it was in push forward, was not in Heartland, was in push forward. I think the important thing there was for sure not in the first category of under strategic review. It's a business that is doing very well. I think it's our responsibility to look upon all businesses to say, can we get better benefit in a different business model. Is there more value that can be created in a different way for some of our businesses? This business could be one of them, where we would like to evaluate, and as you know, it could be a spin, it could be a sell, or we keep it. We are making that evaluation now, and we will know, because I wouldn't like to move forward and ahead of our own process. As said, in the end of Q1, we should know how the outcome of that will be. If you go back and look upon, in my view at least, today, we have a very good process in order to measure our businesses and try to understand where we can leverage even more. In some cases, we have to ask the question: Can we lever more, and can there be more return to shareholders in a different business model? I think that's my responsibility to do, and I think it's our team's responsibility to do, and then we do it. It's not always a business that is underperforming that you need to evaluate. Sometime in a case like this, you have to look upon it. It had been on my mind for some time, I would say, I'm very careful to not overload the organization, the initiatives relative to the portfolio. My first objective was to make sure that we got all businesses to a respectable position, and I think we are there now, as you have seen, with result in EEBG as well, then there's a time for everything. Now we are here. We have announced it. We are transparent about it, then we have to see in the end of Q1 what the next step will be. Any case, it's a fantastic business. If it's with us, if it's a spin or it's sold, it's just fantastic. There's nothing wrong with this business. It take courage to take a step like this when you have a business doing as well as this is doing. Thank you. Thank you. Our next question comes from the line of Jeff Sprague of Vertical Research Partners. Please proceed with your question. Thank you. Good morning, everyone. Morning, Jeff. Can we just come back to restructuring? Inge, as you had pointed out, you've done a lot of internal blocking and tackling in this consolidation of these divisions underneath the segments. How would you size what you're announcing here in the fourth quarter relative to kind of the normal ongoing restructuring that 3M must do kind of every day? Yeah. This is of course bigger, right? If you're talking about where you normally type of challenge every step on the way, right? That's what you're talking about. Yes. How much bigger is it? Yeah. Those so-called adjustment, I would say that's more an adjustment of the organization that you do, and you ask yourself the question every time you get an opening: Do we need to replace it and so forth? This is more sizable at this point in time, and why now is very much that I feel now that we have a very good handle on our model in terms of operations. It's like when you go through everything as you describe it, you have pieces that are moving the whole time in your portfolio, et cetera. You're coming to more of a stabilization. You look upon it to say, okay, is there more that can be done, and should we do it now? It's 1,500 people. It's sizable in my view, for each individual person that is impacted by it, right? I'm very sensitive to the whole situation, it's something that we need to do in order to build strengths on strengths. People can view it saying 1,500 is it a lot or is it not enough? For us, it's perfect at this point in time, and I don't underestimate that because I understand the impact for each individual of those 1,500 that need to go away and do something different. As you've restructured these other segments, though, there's just ostensibly excess overhead and facilities. Those have just kind of attrited down through this process, or would we expect that at some future date, not too distant in the future, there could be other moves like this? As I said earlier, in my view, in our view is as we move ahead here, we have an opportunity in our supply chain area. That will be maybe something we will talk about as we move ahead. That's different in a way. That's about the whole model of us improving our balance sheet, our turns, and reduced inventory and so forth. If you do that as you go down the line, you can think about the less distribution centers, maybe few manufacturing sites, et cetera. The beauty with all that, despite we are doing very well, there are still opportunities in 3M in order to create value. Great. Just one really quick one. Was there any change in kind of the monthly trends in your business, Inge? We've heard from some that July and August was okay, September was much more challenging. Did you see anything like that across your business? Jeff, this is Nick. We didn't. As we look at the three months, they were all very similar. Thank you. Thank you, Jeff. Our next question comes from the line of Steve Tusa of JPMorgan. Please proceed with your question. Hey, good morning. Thanks, fit me in. Thanks, Steve. The electronics margins were pretty strong, despite the continued revenue pressure there. What's going on there in electronics, and I guess, where do you go from this higher base? Well, Steve, Ingun talked a little bit about this earlier, about the margins going on there. A number of things of some of the consolidations that have occurred, the push on productivity and relevance with our customers, and building a business there that is not dependent on growth as a way to generate a margin in this range. That going forward, this is still a business that we see opportunities for growth in the future. We continue to invest in this business, as far as margins going further, I'm not ready to make a statement like that yet, we continue to see this business growing and margins that are at or slightly higher than the total company margins. I guess, just stepping back to the macro a bit, I guess from your commentary, I just want to make sure that I'm kind of reading what you're saying the right way. You're basically saying that there's not a lot of inventory dynamics going on here. I guess as we look at the second half of the year with volume flat, is there any real impetus for a pickup as we move into next year? Or is this kind of the, look, this is the environment we're in, that's why you guys are taking restructuring, you're holding the line on price a little bit better than expected? I just want to kind of make sure I parse out the macro comments and understand where your head is at on the degree of potential acceleration or good news that could come moving beyond the fourth quarter. Steve, as we look forward, we remain constructive on our view of the global economy for 2016, albeit we're expecting a similar slow growth environment to what we're seeing in 2015. When you ask about impetus of other things changing, as we look at 2016 for us, in addition to that slower growth organic world, we are expecting raw material benefits to continue into 2016, but at a lower level than what we've seen in 2015. This restructuring that we discussed this morning, that will be accretive to our views for 2016. Pension OPEB, right now we see that as a benefit to us in 2016 of approximately $100 million. Of course, we'll continue to drive productivity in our company, as well as getting benefits from our capital allocation strategy that we have been following and will continue to follow. Headwinds that I see right now going forward into 2016, FX has been a headwind throughout 2015. We see it being a headwind for us in 2016, just not on the same level. We see it at a lower level than what we've seen in 2015. Then just to round it out, as I look at 2016, I also see interest expense as we're following our capital structure, capital allocation strategy, we see interest expense going up in 2016. I guess next year, can you still kind of get to that longer-term model that you guys have talked about, that kind of close to double digit, even with current volume levels? Yeah, Steve, we're still in the stages of putting together our entire 2016 plan. We'll share more details on that on our December 15th conference call. All right. I had to try. Thanks. Thank you, Steve. Always a pleasure. Ladies and gentlemen, as a reminder, we ask that you please limit your participation to one question and one follow-up. Our next question comes from the line of Julian Mitchell of Credit Suisse. Please proceed with your question. Hi. Thank you. Hi, Julian. Nick, hi. Just following up on the comments around capital allocation and what that means for interest expense and so on. Just more broadly, I guess when you're thinking about the buyback target for the medium term that you'd laid out a few years ago, maybe talk about what's the scope for that to move up, and how you view the credit rating in the context of the propensity to increase capital allocation. Thanks for the question, Julian. We're continuing to follow our capital allocation and capital structure strategy that we've laid out. We do see that we're continuing to make progress on that capital allocation strategy. You saw in 2015, us deploying $3.5 billion into mergers and acquisitions. Our plan does call for us leveraging our balance sheet to grow the business, investing first in the business, but maintaining some flexibility for opportunistic deployment. We're continuing on the path we've laid out, Julian. In regards to your question about On debt rating. As we've indicated in the past, we would consider a downgrade for the right value-creating strategic opportunity. Those include acquisitions as well as times when we see 3M as a good value to buy ourselves. Thanks. Just a very quick follow-up on emerging market demand. Obviously, a lot of people have expected that to tail off for 3M in recent months. It didn't happen in Q3. Just to confirm, sort of as you entered this quarter, how were the emerging market organic trends in aggregate? Were they fairly similar to a few months ago? Yeah, I think so. Yeah, if you take in totality, yes. China shift a little bit positive for us actually in this quarter. Not much, but a little bit, right? You go minus 3 to plus 3, right? You're not overly happy with core business China 3%, but it's much better than minus 3, right? I would say, I think we went sideways with almost 2% growth in what I call developing economies. My view there is you adjust your organization as you speak, but I still, specifically in domestic businesses, which for us is healthcare and consumer, huge penetration opportunities, and then for the rest, it will be very much based on the global economy and export businesses, et cetera. I would say in between Q2 and Q3, we went sideways with some small growth. As you know, Brazil is at a tough time. We're minus 2 in Brazil, but that was slightly better than in Q2 anyhow, right? It's a tougher situation, but it's absolutely not hopeless, and we have penetration opportunities that we try to go after then. Great. Thank you. Thank you. Our next question comes from the line of Laurence Alexander of Jefferies & Company. Please proceed with your question. Good morning. Just one quick one. With the productivity related to the ERP and supply chain improvements, do you see the benefits flowing through in a fairly even cadence from here, or will there be extra costs in 2016 and 2017 that will dilute the impact initially and then make it stronger later in the decade? Laurence, two parts to the question that I'll go through here. First of all, from the cost standpoint of our investment in business transformation, we're at a point where we're at the peak of what we're investing in this, and any incremental investments would be small or nonexistent of what we're spending on that initiative. In the coming years, we expect to see ourselves growing to build to that $500 million-$700 million of operating income benefit that we've shared. I'm quite confident as we talk in December 15th about our outlook for 2016, you'll start to see some of those benefits being shared at that time and how they'll impact 2016. Starting small, but then growing as we progress to 2020. Thank you. That concludes the question and answer portion of our conference call. I'll now turn the call back over to Inge Thulin for some closing comments. Thank you. To wrap up, we continue to deliver a solid operational performance in 2015, and I thank our whole 3M team for an outstanding effort. This quarter, we expanded margins and posted strong earnings while taking many actions to strengthen our long-term competitiveness. We're executing our plan and controlling what we can control and building for the future. Thank you again for joining us this morning, and have a good day. Okay. 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.