And gentlemen, thank you for standing by. Welcome to the 3 ms First Quarter Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded, Thursday, April 23, 2015.
I would now like to turn the call over to Matt Ginter, Vice President of Investor Relations at 3 ms.
Thank you. Good morning, everyone. Welcome to our Q1 2015 business review. On the call today are Ingo Telleen, 3 ms's Chairman, President and CEO and Nick Gangstedt, our Chief Financial Officer. Each will make some formal comments and then we'll take your questions.
As a reminder, please mark your calendars for upcoming earnings call dates, July 23, October 22, and January 26. Also take note of our next investor meeting, which is scheduled for December 15th. More details will be available as we get closer to that date. Today's earnings release and the slide presentation accompanying this call are posted on our Investor Relations website at 3m.com. Please take a moment to read the forward looking statement on Slide 2.
During today's conference call, we will make certain predictive statements that reflect our current views about 3 ms's future performance and financial results. These statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Item 1A of our most recent Form 10 ks lists some of the most important risk factors that could cause actual results to differ from our predictions. Please turn to slide 3, and I will hand off to Inge.
Thank you, Matt and good morning everyone. I appreciate you joining us today. 3M executed well and delivered another solid quarter of operational performance. We once again posted broad based organic sales growth and continued to improve profitability. Importantly, we achieved this against a more challenging Q1 economic backdrop.
The rising U. S. Dollar negatively impacted revenues and profits offset in part by hedging gains. In addition, global economic growth slowed, which we saw a bit in our growth figures. As 3M always does, we continue to manage those things within our control, execute our plan and build for the future.
I'll take you through the Q1 highlights. Earnings were $1.85 per share, up 3% year over year. Sales were $7,600,000,000 in the quarter, down 3% versus last year. Organic local currency growth was 3.3%. For the 7th consecutive quarter, 3M posted organic growth in every business group as well as across all geographic areas.
As I mentioned, the U. S. Dollar strengthening significantly against the number of currencies, reducing sales by 6.5%. We expanded company wide margins to 23%, up nearly a full percentage point from last year. And all business groups delivered margins greater than 21%.
Rising margins and broad based organic growth are more evidence that our portfolio actions over the last 3 years are paying off. This quarter, 3 ms took a number of additional steps to strengthening our portfolio. We announced plans to acquire Polypor's separations media business for $1,000,000,000 which will enhance our core filtration platform. Last month, we completed acquisition of Ivera Medical, a good addition to our healthcare business. And at the same time, we completed the sales of our static control business in January.
Also in the quarter, we returned $1,500,000,000 to shareholders through dividends and share repurchases. And finally, we increased the 1st quarter dividend by 20% on top of a 35% increase last year. Nick will now go through the details of the quarter. Nick?
Thanks, Inge, and good morning, everyone. Please turn to Slide 4, where I'll review the components of our Q1 sales change. As Inge mentioned, in the quarter we delivered positive organic growth in all business groups and geographic areas. Worldwide organic local currency growth was 3.3% with volumes up 2.3% and selling prices up 1%. 2 healthcare related acquisitions, namely Trail Solutions and Ivera Medical added 10 basis points to growth.
This impact was offset by the divestiture of the static control business, which reduced sales by 10 basis points. The stronger U. S. Dollar reduced sales by 6.5%. In U.
S. Dollars, total sales declined 3.2% versus the Q1 of 2014. The U. S. Dollar significantly versus several foreign currencies during the Q1, continuing a trend that began in 2014.
In particular, the average euro rate declined 18% versus the U. S. Dollar year on year. The yen declined 14% and the Brazilian real 19%. Looking more closely at organic local currency growth, Asia Pacific led the way at 5.6%.
Safety and Graphics again posted the strongest growth in APAC at 9%, followed by Healthcare at 8% and Electronics and Energy at 7%. Organic growth was 7% in China, Hong Kong or 8% excluding Electronics, similar to recent quarters. Japan was up against a challenging comp. Recall that Japan's organic growth was 20% in the Q1 of last year, leading up to the April 1, 2014 consumption tax increase. EMEA organic growth was slightly positive in the Q1 with West Europe flat, Central East Europe up mid single digits and Middle East Africa down slightly.
Organic growth in EMEA was led by Electronics and Energy and Safety and Graphics at 4% and 1% respectively. We posted 4% organic growth in Latin America Canada where industrial, Safety and Graphics and Healthcare all grew 5%. Mexico delivered another outstanding result with 15% organic growth in the quarter and Brazil was down 2%. The United States grew 3.1% organically with industrial, healthcare and consumer each growing 4%. Safety and Graphics and Electronics and Energy each grew 3%.
Please turn to Slide 5 for the Q1 P and L highlights. 1st quarter sales were $7,600,000,000 down 3.2%. Operating income on the other hand increased nearly 1% to $1,700,000,000 and earnings rose over 3% to $1.85 per share. Early in the year, it became apparent that business conditions would be more uncertain, particularly given that the U. S.
Dollar was moving higher. As always, we had contingency plans in place and we executed those plans Q1 played out. Gross margin improvements and strong SG and A productivity allowed us to increase 1st quarter operating margins by 90 basis points year on year to 22.8%. For the full year, we expect operating margins to increase by a minimum of 1 percentage point. Let's take a closer look at this quarter's margin improvement.
Organic volume leverage added 20 basis points to operating margins and the combination of lower raw material costs and higher selling prices contributed 120 basis points of margin expansion. We continued to generate positive selling price changes across our businesses, boosted by 3 ms world class material science and strong new product flow, both of which are important elements of our business model. In addition, we have been raising prices in select countries to help mitigate the impact of currency devaluations. On the raw material front, we are benefiting from both lower commodity prices and from our sourcing negotiation efforts. We expect raw material benefits to gain momentum as the year progresses.
Productivity added 30 basis points to margins as spending remained under good control in the quarter and foreign currency impacts net of hedge gains were neutral to margins. 1st year acquisitions were 10 basis points dilutive to our operating margin in the quarter. In addition, we continue to make other strategic investments, including disruptive R and D programs along with business transformation and ERP. These investments reduced operating margins by 20 basis points year on year. Finally, higher pension and OPEB expense reduced 1st quarter operating margins by 50 basis points.
As a reminder, this year's pension increase is a result of the adoption of new mortality tables along with a lower discount rate. Summarizing the Q1 P and L, our teams executed well in the face of currency headwinds and a more mixed economic backdrop. EPS expanded year on year and margins increased by nearly 1 percentage point. Now let's turn to Slide 6 for a closer look at earnings per share. Earnings for the Q1 were $1.85 per share, an increase of 3.4%.
Organic growth and margin expansion contributed $0.14 to the EPS increase in the quarter. This included a $0.04 headwind from higher pension and OPEB expense. Foreign currency impacts net of hedging reduced pretax earnings by $90,000,000 or the equivalent of $0.10 a share. The first quarter tax rate was 29.5 percent versus 27.4% in the comparable quarter, which reduced earnings per share by $0.05 The increase was due to geographic mix, which was influenced by the strong U. S.
Dollar. In addition, Q1 2014 included a one time benefit that did not repeat. Average diluted shares outstanding declined by 4% versus last year's Q1, which added $0.07 to 1st quarter earnings per share. Now let's review cash flow performance on Slide number 7. We generated $1,100,000,000 of operating cash flow in the quarter in line with Q1 2014.
Capital expenditures were $291,000,000 consistent with last year's Q1. Our full year expected CapEx range is $1,400,000,000 to $1,600,000,000 down $100,000,000 versus prior estimates, all due to the stronger U. S. Dollar. 1st quarter free cash flow was $789,000,000 and we converted 66% of net income to cash in line with last year's Q1.
Note that the Q1 is typically our seasonal low. For full year, we continue to expect to be in the range of 90% to 100%. As Inge mentioned earlier, we increased our Q1 per share dividend by 20%. We paid out $652,000,000 in cash dividends during the quarter. Gross share repurchases were $886,000,000 in the Q1 and we continue to plan $3,000,000,000 to $5,000,000,000 for the full year.
Now let's review our Q1 performance on a business by business basis. Please go to slide number 8. Industrial with sales of $2,700,000,000 delivered organic local currency growth of 3% in the quarter. Our Aerospace and Commercial Transportation, Automotive OEM and 3 ms Purification Businesses all generated high single digit growth. We also posted positive organic growth in Advanced Materials and Industrial Adhesives and Tapes.
On a geographic basis, Latin America and Canada set the pace with organic growth of 5 continue to invest for the future within industrial. During the quarter, we announced our intent to acquire Polypore's separations media business for $1,000,000,000 This business is a leading provider of micro porous membranes and modules for filtration in the life sciences, industrial and specialty segments. The acquisition will enhance 3 ms core filtration platform and help generate new growth opportunities across the company. Wrapping up on Industrial's 1st quarter performance, operating income was $598,000,000 and operating margins were 22.5 percent, up 20 basis points versus last year's Q1. Now let's turn to Safety and Graphics on slide 9.
1st quarter sales in Safety and Graphics were $1,400,000,000 increasing 4% organically. Personal Safety grew high single digits in the quarter. Worker safety remains a high priority for manufacturers globally and we are gaining share. In addition, our respiratory products are continuing to sell well in China where air quality is an ongoing concern. Commercial Solutions and Traffic Safety and Security each posted positive organic growth, while roofing granules declined year on year.
Asia Pacific delivered 9% organic growth, Latin America Canada increased 5%, the U. S. Was up 3% and EMEA increased 1%. Operating income was $335,000,000 and operating margins increased 2.1 percentage points to 24.4%. Margins in this business continue to be boosted by strong productivity and a keen focus on prioritization and portfolio management.
Let's now turn to Healthcare on Slide 10. Healthcare delivered sales of $1,300,000,000 and organic growth of 3%. Growth was strongest in food safety, critical and chronic care and health information systems. Our infection prevention and oral care businesses also posted positive growth in the quarter. The drug delivery systems business declined year over year.
Geographically, organic growth in Asia Pacific was 8%, while Latin America, Canada and the U. S. Each grew 4%. EMEA declined 1%. In developing markets, healthcare grew 10% organically, marking the 13th consecutive quarter of double digit growth.
This has been a high priority In March, we successfully closed the acquisition of Iverao Medical Corporation. This business will enhance 3M's vascular access product offerings to healthcare facilities. Integration is going smoothly and we look forward to expanding this business globally. Healthcare's operating income was $408,000,000 and margins remained strong at 30.7%. Note that 1st quarter margins absorbed 40 basis points of dilution from the Iverao and Trejo acquisitions.
Therefore, underlying margins were 31.1%. Next, we will look at Electronics and Energy on Slide 11. Electronics and Energy delivered 6% organic local currency growth in the Q1 with sales of $1,300,000,000 Organic local currency sales grew 12% in our electronics related businesses as we continue to see strong consumer demand enhanced by specking wins at several OEMs. In our energy related businesses, organic local currency sales declined 3%. The electrical markets business was flat, while Telecom and Renewable Energy both declined year on year.
On a geographic basis, organic growth in Electronics and Energy increased 7% in Asia Pacific, 4% in EMEA and 3% in both the U. S. And Latin America Canada. The divestiture of the static control business, which closed on January 2, 2015, reduced sales by 90 basis points in the Q1. As a reminder, sales for this business were $46,000,000 in 2014.
Operating income for Electronics and Energy was $283,000,000 and margins increased 4.1 percentage points year over year to 21.4%. Recent portfolio management actions are improving our relevance with customers, enhancing our growth capabilities and contributing to higher productivity and margins. Please turn to Slide 12. 1st quarter sales in consumer were $1,000,000,000 with organic growth of 2%. All four businesses in consumer grew organically led by do it yourself and home care each growing mid single digits.
Looking by geography, the U. S. Grew 4% and Asia Pacific increased 2%. EMEA and Latin America Canada declined slightly year on year. Operating income increased to $240,000,000 and margins were 22.9%.
Margins rose 1.7 percentage points year over year. The business continues to drive efficiencies through investment prioritization and executing on productivity programs. Before turning to our 2015 outlook, let me comment on corporate and unallocated. Net expense was $100,000,000 in the first quarter versus $72,000,000 in Q1 of 2014. With U.
S. And pension post retirement expenses being the primary reason for the increase. For the full year, we estimate corporate and unallocated net expense to be approximately $400,000,000 That wraps up our Q1 results. Please turn to Slide 13, where I'll address our full year planning estimates. On organic growth, we expect 3% to 6% for the year, so no change versus prior thinking.
Foreign currency translation is forecasted to reduce 20.15 U. S. Dollar sales by 6 to 7%, up from a previous range of 4% to 5%. For the 2nd quarter specifically, we expect FX to reduce sales by 8%. With respect to earnings, we now anticipate full year EPS of $7.80 to $8.10 per share versus a previous estimate of $8 to $8.30 per share.
In our Q4 business review on January 27, recall that we estimated our foreign currency impacts would reduce 20.15 earnings by approximately $0.20 per share. Of course, since then the dollar has strengthened further. Today, we estimate that foreign currency impacts will reduce 20.15 full year earnings by $0.35 to $0.40 per share or an incremental headwind of $0.15 to $0.20 per share versus our January estimates. These figures are net of hedging. For Q2 in particular, we anticipate that foreign currency impacts will reduce earnings by $0.13 per share.
For the tax rate, we anticipate a range of 28.5% to 29.5% versus 28% to 29% prior. The stronger U. S. Dollar is impacting our profit mix by country, which is leading to a higher effective tax rate. Finally, no change as it relates to free cash flow conversion.
We continue to expect a range of 90% to 100% for the year. I will now turn the call back to Inge for a few final comments.
Thank you, Nick. I'm pleased with the performance of our team in the Q1. We executed our playbook and delivered solid results in a tougher external environment. Now more than ever, our teams remain keenly focused on efficient growth, focused both on organic growth and of course productivity. As Nick described, we also took a number of additional steps to carefully manage 1st quarter expenses in anticipation of a difficult economic environment, clearly necessary given external realities.
As we navigate short term challenges, we also continue to invest for long term success. This includes portfolio investments, as I mentioned earlier, as well as our ongoing commitment to building our core strength. I've talked to you before about 3 ms's 4 fundamental strengths, which are leveraged across our enterprise: technology, manufacturing, global capabilities and our brand. On technology, for example, we increased R and D investment in the quarter, while at the same time managing our SG and A investment very carefully. We expanded 3 ms global capabilities, including breaking ground on a new customer innovation center in Chengdu in West China.
As you heard from Nick, our 3 ms China team continues to execute well, delivering 7% organic growth. We remain very optimistic about 3 ms's future in China. And our new innovation center in West China will allow us to collaborate even more closely both with local and global customers and help us take advantage of growing opportunities in that region in China. In March, we also refreshed our brand platform, which includes our new tagline, 3 ms Science Applied to Life. Through our brand work, we will enhance awareness of how 3 ms uses science to solve problems and improve lives.
So in summary, it was a solid Q1 for 3 ms. Our team performed well against tough economical headwinds. We continue to make investments for the
the proceed with your question.
Thank you. Good morning, everyone.
Good morning, Joe.
Inge, perhaps maybe just focusing on organic growth for a second. The percent plus that you did this quarter was towards the lower end of your full year range. And yet as you progress through the year, your comps are going to get a little bit more difficult. So maybe you can just talk about the portfolio and the confidence and perhaps seeing some organic growth acceleration as the year progresses?
Yes. You're right. It was a little bit slower than we have seen in the past. And the way I look upon it is specifically as you came off Q4, it was around 6%. But I think overall when you look upon the economy around the world, the 4th quarter was much stronger than what we saw in the Q1 on a global basis.
So I think first of all, our performance relative to IPI is in the same level as we have seen in the past. I think when you look upon our performance, you could see as you see there, you see a little bit of lower growth in healthcare, which is related to basically one thing, but you can add them together. 1, it's relative to West Europe and it's relative to our drug delivery system that is, I would say, a project based business. So you will have some businesses going in and out of that business based on year end or quarter. So when I look upon health care, that's basically where you can see.
And our core business in health care did very well again. And as you see, we maintained very high margin, etcetera. When I look upon industrial, we had 4% growth in United States for industrial in the quarter, which is acceptable. And I think that was related very much to as there became maybe some uncertainty generally speaking around what will happen for export due to the dollar strengthening and also what you saw in oil. I think people specifically not so much what is designed in and expecting, but maybe on the consumables a little bit cautious as you went into the quarter.
So I don't see that as an issue either. And as you know, that's a big business for us and we continue to invest in IBG. When I say big, it's our biggest is 33% of our portfolio. You saw again electronic and energy did very well. After the reorganization and realignment of that business now over 2 years ago, we really get good traction based on our relevance to customers and speed to market, etcetera.
And Safety and Graphics had also a good quarter. And specifically in Personal Safety that is going into respirator business, we are doing very well on a global base even if it was maybe a little bit slow in West Europe in the quarter, but very well in Asia again and whole of APAC doing very, very well. And then finally consumer that you saw had a 2% growth, 4% was in U. S. Which is our biggest business.
I would say there the slowness was in West Europe and Latin America was slow for them. So when I as we all know a quarter start and end, there's always something going in and out of a quarter. I looked very carefully on 6 months comparisons going back over 2 years. And when we look upon that over 2 years with 6 months comparisons because you don't know always if Easter is coming in Q1 or Q2 etcetera, we have the last 2 years on that comparison been in the range of 4% to 6%, always in 4% to 5% during that period. So this was on the low end, but still in the 3 to 6 that we have set for the year.
And when we look upon and talk to the businesses, what we see going out for the year, I would say that maybe Q2 will be very similar to Q1, maybe a slight improvement, but we'll not count too much on that. And then you will see for the rest of the year more growth will come.
That's really helpful color, Inge. And maybe my one follow-up question for Nick. Can you just can you decompose the price cost for the quarter? You had 120 basis points in benefit. What portion of it was related to FX?
And can you elaborate a little bit on the raw material piece gaining momentum as the year progresses?
Sure, Joe. Happy to break that down. As I said earlier, in total, those components price and raw materials added 120 basis points. You can split that right down the middle. Half of that is coming from selling price increases and half of that is coming from lower raw material commodity prices that we're paying.
And then of the in total what we reported for 1% price growth for the Q1, Joe about 2 thirds of that is directly or indirectly driven by FX movements and about 1 third of that is driven by 3 ms innovation and the new product flow we have.
Okay, great. Thank you. I'll get back in queue.
Our next question comes from the line of Scott Davis of Barclays. Please proceed with your question.
Hi. Good morning, guys.
Good morning, Scott.
I have a little bit of
a strange question for you, Inge. But when you think about China, up 7% is a very, very respectable number. But consumer was up kind of 2 ish. And you seem to be doing really well in China in auto and industrial, but consumer always seems to be a little bit of a challenge. Can you help us understand is it just a function of price points and brand or focus?
Or is there when we think about the consumer build out in China, there seems to be an opportunity for you guys, but I'm not sure your business is really that big in the grand scheme of things over there and don't seem to be growing that fast.
Yes. First of all, yes, we do well in China. We have good traction there. Fact, 8% in the core business if you take out the electronics. Fact 8% in the core business if you take out electronics.
As I've talked earlier, the way the evolution of businesses are going is starting with industrial followed by electronic and energy, then safety, then consumer, finally health care. So consumer for us is a smaller portion in China and so is actually health care as well. I think the answer to your question is that it's very much around brand awareness and brand is in our mind. It's where we all grew up what we are used to etcetera. So it take longer time in order for you to build awareness in those businesses.
That specific market, I would turn health care and consumer around and say health care will get faster traction for us than consumer. So I would say I agree with you. I hope we will be bigger at this point in time. I hope we've been able to grow faster, but we will over time. So it is we have some very strong brands.
It's just that they take time for us to get awareness and build out in the category. And we're also very careful who we deal with in China relative to the channel partners. So I think it's over time, it will be big. We grow faster and we just need to make sure that we get with that business good profitability for us as well, right? So we are not as you know giving away things and it's not only about market share.
We need to make sure that we are investing in businesses where we get a good return. And there is some very good businesses for us in China as we speak as you know both in just talk about for purification is just growing fantastically. We continue to invest in that. So I hope that gave you a little bit of flavor why it's smaller.
Yes. That's helpful. And then as a follow-up to that, I mean, when you think about pricing going on getting 1% price in this type of a lower raw material environment and challenging macro in general. And what is the interplay between price and volumes? I mean, would you did you give up some volume this quarter to get that price?
And it's hard to say with some of your markets you create the categories. So it seems like you should be able to get pretty good pricing power. But clearly with the currency moves, I would imagine Yes, Scott, we don't see that we
Yes, Scott. We don't see that we're giving up volumes in exchange for price. And it really comes back to 3M's business model of investing in innovation, having that strong new product flow. It gives us the ability to reflect the value that we're creating in the markets and for our customers. So it's something we're conscious of, we monitor.
But right now, Scott, we're not seeing our stance on pricing in light of the current cost of raw materials as impacting our volumes.
Okay. Very helpful. Thanks guys. I'll pass it on.
Thank you, Sean.
Our next question comes from the line of Deane Dray of RBC Capital Markets. Please proceed.
Thank you. Good morning, everyone.
Good morning, Deane. Good morning, Deane.
Hey, on the topic of FX, Nick, maybe if you could help seek the effectiveness of the new hedging program. Just you extended the duration from 12 to 24 months, but how is that program working versus your expectations?
Yes. Dean, thanks for the question. For those that may not know what Dean is talking about, in the middle of 2014, we extended the tenor in our hedging program to go out from our past policy of going out and hedging 12 months out to now hedge in addition to that 24 36 months out. And to answer your question, it's going quite well, Dean. The true impact of going out with the tenor into 24 36 months that will manifest in 20 16.
And if you look at the amount of deferred gains that we have in our hedging program that's reflective of our of that change in our hedging program.
Great. And then a follow-up would be for Inge on the Polypore acquisition. And maybe if you
could just take us through and maybe this has
a little bit of the boost that Ceradyne gave you was where else will you apply ultrafiltration across 3 ms businesses? And then within your answer maybe what does ultra filtration give you that Kuno did not?
Yes. First of all, as we not have closed on Poly Pro, I would not like to talk about that specifically, right? So we have to respect the regulatory approvals that we are waiting for. So I will not talk about that. But if you think about it broader relative to our filtration business, that is a huge opportunity for us.
And I will look upon that as I will combine it if you like to think about it in terms of our nonwoven technologies combined with what we have in our purification business and then some additional technologies that will be added later on. So if you think about global megatrends that are related to both air pollution and clean water that is where we will play big time with the platform as we go ahead. So I would say that I'm very encouraged actually relative to our current performance both in purification and in personal safety that is around respiratory products and we will build out those businesses as we go. So think about it as a good way of us to extend our technology capabilities in order to create more value in those spaces, which is both global megatrend, but also local megatrends. And as Scott and I talked about too early relative to China, China this is a huge opportunity as we all know and everyone know that, but you need to be able to capitalize on it with technologies, because in the regulatory business.
We need to make sure we have product that meet the standards.
Thank you.
Thank you.
Our next question comes from the line of Steven Whittaker of Bernstein. Please proceed with your question.
Thanks and good morning. Did you all see any volume de stocking across your distribution in any of the business units? We've been hearing some short term trends from some other companies on that front.
Destocking or?
Destocking, yes.
Yes. I think that when you upon it, I can I will not say yes big time, but I suspect that all of us leading businesses like we do at 3 ms and our customers, as some uncertainty came in Q1, as I said earlier both relative to exports from U? S. Based on the strength of the dollar and oil price. I think that most companies, Jan was speaking, were very careful of how you build and manage your inventory in Q1.
So I think I will be surprised even if I don't have any facts in front of me to say that people managed the inventory very tightly and as tight as they could in Q1 and so did we by the way, right? So it's I think that's the answer. Steve, this is Matt.
Maybe one comment. In the consumer business, which you'll see on one of the slides, our point of sale growth was good. It was higher than our actual growth. So there may have been some a little bit of inventory takeout at the retail channel.
Okay.
Well, and then Matt on the consumer side, I think that was still the lowest growth since what maybe the Q4 of 2013. Was that
related in any way or?
Yes, that was the point. The out the door sales were actually better than that. So there's some adjustment there in the channel. Okay.
And then a follow-up question on pricing. You mentioned earlier that 2 thirds of the 1% price increase was FX related and a third was roughly was new product development and etcetera. So I'm just trying to get a sense, are you seeing pressure on pricing in that you think is currency driven in other markets from an export perspective from your competition? Is this something where people are trying to take advantage of it?
Yes. Steve, we're on that's something we're constantly on the lookout for in this time of volatile FX. So is this changing the competitive landscape for us. And at this point, we are not seeing evidence of it changing our competitive landscape or our ability to price in manner similar to how we priced in the past in multiple geographies including the United
States. Our next question comes from the line of Shannon O'Callaghan of UBS. Please proceed with your question.
Good morning, guys.
Good morning.
Maybe just to follow-up on sort of tightly managing business in the Q1. As you mentioned, you're kind of doing that with inventories and others are as well with FX and oil uncertainty. Is that uncertainty now viewed as or do you view it as having lessened given some stabilization, I guess, the prices of oil and the currencies or such that you would manage those things less tightly in 2Q? Or how do you view that where we stand today?
In terms of managing our spending, tightly, I don't see that changing as the year goes on, particularly in markets like West Europe and the United States, some of our developed markets where we're managing our spending pretty carefully right now.
Yes. I would say that there will not be any change as we move into Q2 here relative to operation. I was saying that the team here is on this big time. So that will be no change short term relative to what we need to do. And we have an aggressive plan for the year and we will do everything we can in order to make sure we deliver on that
one. And then just in terms of how the Q1 progressed, we're getting sort of different stories from different companies about how the year kind of started and exited 1Q. And did you see any variation across the months of the quarter, either a slow start that improved or vice versa?
Yes. That's something we're always looking at is, is there a change in trend? And as we look as our revenue progressed through the quarter, we really did not see a meaningful trend one direction or the other throughout the quarter. We have one off things occurring like when Chinese New Year is and when Easter is. When we adjust for those things, we really see no meaningful trend through the quarter.
Okay. Thanks guys. Our next question comes from the line of Nigel Coe of Morgan Stanley. Please proceed with your question.
Thanks. Good morning. Good morning, guys. Good
morning, Nigel.
Yes. So Nick, just wanted to go back to the raw material commentary. I think you guided $0.15 to $0.25 benefit for the full year back in December. And it looks like you had about $0.05 of benefits this quarter. So are we now looking at a situation where the raw material benefits now above the $0.25 given your commentary that it's more back end loaded in your plan?
We yes. So in December, we laid out a range of $0.15 to $0.25 that we were expecting for raw material commodity price benefits. On January 27, in our Q4 earnings call, we updated that say we now see ourselves at the high end at $0.25 And Nigel, what we have been seeing is this is playing out almost exactly as we've expected. It's from a commodity pricing. We see it fairly balanced throughout year.
The only nuance on that is that there's some inventory channel work through of using slightly more expensive inventory through our channel, which is what makes it just a little bit less in the Q1. But that's all progressing right to our $0.25 that we that I stated back in January.
And my math on the benefits, on the 60 bps of benefits, that's about $0.05 is that about right for the quarter?
60 bps would be about approaching
I think it's about $0.04 $0.94 Okay. We'll get back to you.
Yes. That's fine, Matt. Thanks for that. And then just secondly, on the margin bridge, I just want to understand the neutral impact of FX because we'd assume that the hedge gains would have been a net benefit to margin. So I just want to understand why that's flat.
And if possible, if you could call out how much of the gain came through in 1Q?
Yes. There's a couple of different forces there, Nigel, that in this quarter netted out to no change to the margin. There's the hedging gain, which is an absolute upside benefit to the margin, but that's offset by a differential to the margin where we source things to the extent to which our international companies source products from a U. S. Dollar currency, that has a negative impact on margins.
Those two things offset each other in 20 in the Q1 of 2015. As we look out over the remaining three quarters of the year, that will likely become slightly accretive to our margin, very similar to what we saw in 2nd quarter and then a little more accretive in 2nd in 3rd and 4th quarter.
Okay. Any way you could quantify that,
Nick? Excuse me, Nigel?
Okay. Any way you can quantify that benefit?
When I'm saying I'm talking small like 10, 20, 30 basis points just to put a range on that.
Okay. Thanks. And I apologize for the nerdy questions. I'll pass it on. Thanks a lot.
Our next question comes from the line of Robert McCarthy of Stifel. Please proceed with your question.
Good morning, everyone.
Good morning, Robert.
Just one quick question on just any update on what you're seeing with ERP and the traction in terms of your investments?
Yes. We it's going well. We as you know, we are so updated you in December and even after that. We are rolling out as we speak now in Europe, in West Europe specifically. And the next place to go live is in Nordic.
And we are rolling that out accordingly to plan. And we went from go when we tested it country by country now to go regional and we go in West Europe first. And I think it's 1st week of the or we go in July 2nd week in July is when we will roll out in Nordic next. So everything is on plan.
Thanks for your time.
Thank you.
Our next question comes from the line of Steven Tusa of JPMorgan. Please proceed with your question.
Hey guys, good morning. Good morning, Steve.
On the hedging dynamics, I guess, I could kind of
do the math on that. I'm not sure whether it's in the 10 ks or not or the 10 Q, but what would it what are you looking at for 2016 if the euro stays where it is today? Is there an impact there? Do you go all the way out through 2016?
Yes, Steve, we are hedged out through 2016, in fact, a little into 2017. And just to put the numbers on it for 2015 versus 2016, we're estimating approximately $175,000,000 of hedge gains to our P and L in 2015. And if everything stayed right where it is, that would be followed by $110,000,000 of hedge gains in 2016.
Got you. Okay. Has anything changed with regards to how the ForEx is dropping through exclusive of the hedges? I think Dan I heard today talked about a higher margin on their drop through.
No, I'm No,
I guess what I'd say Steve is back to the couple of And that is our expectation for the year. So when we calculate and that is our expectation for the year.
So when we calculate that when we calculate the impact,
we take our numbers and pull out the sales impact from FX and the bottom line impact from FX, recalc the margin. And if you're hedging by definition, your margin should go up slightly.
Right. Right. So one last question just on the so basically similar growth in the Q2 to the Q1. Should we be I mean can growth get to in this kind of economy, this kind of outlook can growth get to like above 6% in the second half? I mean is that should we be thinking about high end of the range type of growth in the second half of the year?
I mean can it accelerate that much?
Well, we do not change our guidance for the year at this point in time. So you have 3% to 6%. And we so I think you're describing correct. As I said earlier, think about it very similar to Q2 as Q1 and then we will see an acceleration in the last part of the year second half. And I will not predict at this point in time how high it will go, right?
Because we are not immune to the economical environment and how that will accelerate. But our performance of 1.5x to 1.7x IPI is steady, as I said, historically when I look upon those 6 months periods that you and I have talked about earlier. So it's I'm optimistic of the 3% to 6 percent for the year.
And then just one last question. Are you guys seeing any impact from competitors, global competitors, given the foreign exchange movements? I mean, I think of your products as pretty defendable with good moats, but and anybody getting aggressive out there on price?
Well, we have all type of competitors, right? We have global competitors. We have regional competitors. We have local competitors. So we are working with this the whole time.
And I would say as Mick said earlier, up to this point in time, we have not seen any change in their behaviors versus what we see the whole time when we do business on a day to day basis. So the answer to that is no. But of course, we have competitors, right? And they are everywhere and they are very attractive, of course, to come into spaces where we are because there is growth and there is good margin. So but we have not seen any change in their behaviors up to this point in time.
Great.
Thanks a lot.
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. Just a couple really quick ones. Good morning. Just back on FX, I would imagine those hedges are on a handful of major currencies.
My question is if you maybe that's right or wrong, but the larger question is if you think about that $110,000,000 hedge gain that you have for 2016, does that fully cover kind of the top line driven FX headwind you'd expect in couple of questions there to go through.
One is, A couple of questions there to go through. One is, it's largely in developed markets and those currencies that we're able to cost effectively hedge. So currencies like the euro, the Canadian dollar, the yen, the Australian dollar. Those are examples where we do the majority of our hedging. Other currencies such as the Brazilian real that's less cost effective for us to hedge in markets and currencies like that our approach is to rely more on natural hedges, meaning how much do we source locally, our ability to price to offset some of the FX movement, our ability to manage our cost structure in those places.
Those are part of 3M's playbook on managing FX in more developing markets. To your question on does this fully cover the currency exposure going into 2016? No, it doesn't. It's never our intent with our hedging strategy, our financial hedging strategy to offset all of the risk. We offset a portion of it to help minimize reduce volatility and we also do it to buy time for us to adjust our business models accordingly.
So it doesn't negate all of the risk in 2016, but it buys us more time and takes some of that volatility off the table.
Great. Thanks. And I'm just wondering on strategic investments, Is there any change in tempo over the course of the remainder of the year?
No, there is not. I mean, we are working our plan and we are a couple of years into it as you know. So there is no change in the tempo relative to our ERP program or investment in research and development in what we call the i3 or any small restructuring as we're doing here and there when we have the opportunity to do it. So the plan from that perspective is working and it's working well for us.
Okay. Thank you very much.
Thank you.
Our next question comes from the line of Laurence Alexander of Jefferies. Please proceed with your question.
Two quick ones. Can you characterize how you see the setup for the year in European Auto? Some companies have talked about that as being the most likely area for green shoots in terms of domestic activity? And secondly, are there any regions or end markets where as you look at the sequential trends into March April, the deceleration was sharply worse than you expected?
Well, on the European front, first of all, our automotive business globally is doing very well. I think we have 9% growth in the quarter versus 1% growth in the auto build. So again, we are doing very, very well. And that's a global business. So we do well with all the global players.
Relative to Europe, we have good penetration on design and spec in there as all other places. And you could assume, but who knows that in the later part of the year that export generally speaking for West Europe will improve due to the dollar versus euro and other currency. And by then by definition, automotive will capitalize on that as well. So assuming that that is correct as everyone talked about then there will be improved export from Europe generally speaking. Automotive by definition is a big engine for growth in West Europe as we all know.
Now many of the automotomakers they're designing and specking on certain places and they produce at other parts of the world. But many of them in Europe are exporting quite a bit outside of West Europe in terms of the manufacturing. To your Q2, no, I will not say there was any change with more than which is a small piece is Middle East Africa. Middle East Africa, as we all know and understand due to geopolitical issues, there are challenges. So I would say that was not in March.
I think that was for the whole Q1 was a total different environment to do business in. So I think that's the only place that we could see any change in trends, right? But that's understandable in a way. We just manage it through the situation.
Okay. Thank you.
Thank you.
That concludes the question and answer portion of our conference call. I will now turn the call back over to 3 ms for some closing comments.
This is Matt. It's obviously a very busy earnings day. So we really do appreciate you spending the hour with us. Thank you very much. We look forward to speaking to you very soon.
Bye bye.
Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect.